A company-owned vehicle used for business purposes (if it is documented) is not considered taxable income. However, when your employee uses the company car for personal use, it becomes taxable and must be reported on their W-2.
Personal use of a company vehicle for non-work-related purposes is a taxable perk known as a de minimis fringe benefit. Examples of using a company vehicle for personal use includes:
Infrequent personal usage of an employer-provided vehicle is typically deducted from an employee’s salary.
The value of personal use of a company vehicle must be reported as income at least once a year. There are four methods 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 the lease value rule, multiply the annual lease value of the car (via the IRS Annual Lease Value table) by the percentage of personal mileage 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. Federal tax laws stipulate that employer-provided fuel must be valued separately.
Using this method, the FMV is determined by multiplying the IRS standard business mileage rate by the number of personal miles driven.
Two conditions must be met for you to use this method:
The IRS Business Mileage Reimbursement Rate is 62.5 cents per mile as of July 1, 2022.
The 2023 rates will be released in December.
Commuting Value Method
With the commuting valuation rule, 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 to use this method:
Here are a few more helpful tips when you are determining which method to use to calculate the use of a personal vehicle according to company car tax rules:
Employee 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.
The personal use of a company-owned automobile is considered part of an employee’s fully taxable wage income and proper documentation is vital. If you cannot determine business versus personal use, the value of the vehicle would be 100% taxable to the employee for both types of usage. It is important to get this reporting accurate, so your employee’s taxes (and yours) are correct come year-end planning time.
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