A company-owned vehicle 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.
Here’s what you need to know to complete Form W-2.
What Does “Personal Use of Company Vehicle” Mean?
Personal use of a company vehicle for non-work-related purposes is a taxable perk known as a de minimis benefit. Personal use of a company vehicle includes:
- 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.
Infrequent personal usage of company vehicles is typically deducted from an employee’s salary.
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 use of a company vehicle:
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 must be valued separately.
Cents-Per-Mile Method
Using this method, the FMV is determined by multiplying the IRS standard business mileage rate by the number of personal miles driven.
IRS Business Mileage Reimbursement Rate is 56 cents per mile as of January 1, 2021.
The 2020 rate was 57.5 cents per mile.
Two conditions must be met for you to use this method:
- The vehicle must be driven at least 10,000 miles annually.
- The maximum FMV of a vehicle for use with this method is $50,400.
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 several 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.
- Is a corporate officer earning at least $110,000 or more
- Is a director
- Earned at least $225,000 or more
- Owns 1% or more equity, capital or profits interest in the business
- An elected official
How Do I Calculate Personal Use of a Company Vehicle?
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.
How Do I Report Personal Use of Company Vehicle for Year-End Tax Planning?
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. You also need to watch if your state reports these wages in box 16.
Why is Calculating Personal Use of Company Vehicle Important?
The personal use of a company-owned automobile is considered part of an employee’s taxable income and proper documentation is vital. If you can’t determine business versus personal use, the value of the vehicle would be 100% taxable to the employee for both types of usage. It’s important to get this right so your employee’s taxes (and yours) are correct come year-end planning time.
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