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Does your company provide vehicles to its employees? If so, you need to pay attention to how this may affect your employee’s taxable income.
A company-owned vehicle that is used for business purposes (as long as it’s documented) is not considered taxable income. However, when your employee uses the vehicle for personal use, it becomes taxable and must be reported on their W-2.
What do we mean by personal use?
Simply put, any time the company-provided vehicle is being used for non-work-related purposes. We’re talking:
- Your employee’s commute between home and work, if it’s on a regular basis.
- Trips unrelated to your organization’s purpose, work, trade, etc.
- Use on a vacation or on the weekend.
- Use by someone other than an employee of your company
What do I do if there is personal use of a company vehicle?
The value of personal use of a company vehicle must be reported as income at least once a year. There are four options for how you report this:
- General valuation
- Annual lease value method
- Cents-per-mile method
- Commuting value method
General Valuation Method
The general valuation method is determined by the cost an individual would incur to lease the same vehicle under the same terms in the same geographic area.
Annual Lease Value Method
To use this method, multiply the annual lease value of the car (via the IRS Annual Lease Value table) by the percentage of personal miles driven. This will give you the Fair Market Value (FMV) of the employee’s personal use of a company-provided vehicle.
As a note, the amount determined from the table includes the value of maintenance and insurance for the vehicle, but not the value of employer-provided fuel. That has to be valued separately.
Cents-Per-Mile Method
Using this method, the FMV is determined by multiplying the IRS standard business mileage rate (54.5 cents per mile as of Jan. 1, 2018) by the number of personal miles driven.
Two conditions must be met in order for you to use this method:
- The vehicle must be driven at least 10,000 miles annually
- FMV of the vehicle when first put into use cannot exceed the luxury car value. The “luxury” car value is $15,900 and “luxury” SUV/Truck value is $17,800.
Commuting Value Method
The value is calculated by multiplying the number of trips by either $1.50 (one way) or $3 (round trip). However, there are a number of conditions that must be met in order to use this method:
- The vehicle is owned or leased by you and provided to your employee for use in conjunction with your business.
- You require your employee to commute to and/or from work.
- You have a written policy prohibiting your employee (and their family) from using the vehicle for personal use other than commuting to and from work. Further, you enforce this policy.
- Your employee is not a control employee. A control employee is someone who:
- Is a corporate office earning at least $105,000 in 2017
- Is a director
- Earned at least $215,000 in 2017
- Owns 1percent or more equity, capital or profits interest in the business
How do I report this?
Personal use of a company vehicle is reported on Form W-2 in boxes 1, 3, 5 and 14 and on Form 941 on line 2, 5a and 5c.
As a friendly reminder, you also need to watch if your state reports these wages in box 16.
Anything else?
Here are a few more helpful tips when you are determining which method to use to calculate the use of a personal vehicle:
- If you use the cents-per-mile or annual lease valuation method, you must use it for all subsequent years you provide a vehicle to an employee.
- The same special valuation method doesn’t have to be used for all company-provided vehicles or for all employees.
- If you have one company-provided vehicle that is used by multiple employees, you must use the same valuation method for all employees using that vehicle.
I’m confused.
We’re just barely scratching the surface of personal use of company vehicles. For more information, check out our W2/1099 Year End Planning book.
Still confused? Just ask. We’re here to help.
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