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.
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:
Infrequent personal usage of company vehicles 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 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.
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:
IRS Business Mileage Reimbursement Rate is 56 cents per mile as of January 1, 2021.
The 2020 rate was 57.5 cents per mile.
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:
Here are a few more helpful tips when you are determining which method to use to calculate the use of a personal vehicle:
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 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.