Eric, with respect Chip is correct. I found the FARs to be very
confusing on this subject. After some research, though, I'm pretty
sure that the following interpretation is correct:

For VFR operations the applicable paragraphs are 91.413, and Part 43
Appendices E and F. You start with 91.413(a). This requires that every
two years you must have transponder electrical checks done in
accordance with 43 Appendix F. As you'll see, if you have a Mode S
transponder there are a lot more checks, so it is more expensive.

Again for VFR, if you've just installed (or done some maintenance) on
a transponder that will be used in VFR operations, you then must
follow 91.413(b). This leads you to 43 Appendix E paragraphs (c) and
(a), which together require the static system to be leak tested,
followed by doing an alititude correspondance test between the
alitimeter and the transponder in which they must agree to within 125
feet. Notice this gets you out of paragraphs (b) and (d), which are
rigorous altimeter checks and record keeping, which makes the testing
cheaper for VFR.

For IFR operations, you start with 91.411. This leads you to comply
with the much more rigorous testing of the alitimeter under paragraphs
(b) and (d) of 43 Appendix E, and in the process of complying with
91.411 you automatically comply with 91.413 (the more limited VFR
requirements cited above).

-John