Do your employees use company-owned or company-leased vehicles?
When an employee uses a company vehicle for business purposes, the vehicle use is a working condition fringe benefit. This means the value of using the vehicle isn’t included in the employee’s income, nor is it taxed.
But, when an employee uses a company vehicle for personal reasons, you generally must include the value of using the vehicle in the employee’s income. And, you must withhold taxes on the value of the benefit.
Learn what’s considered personal use of a company vehicle, how to calculate it, and how to handle taxes and reporting.
Personal use of company vehicle defined
Personal use of a company vehicle is a taxable noncash fringe benefit. Fringe benefits are benefits you provide to employees in addition to their wages.
Personal use of a company car (PUCC) includes:
- Commuting to and from work
- Running a personal errand
- Vacation or weekend use
- Use by a spouse or dependent
This company car fringe benefit is considered part of the employee’s compensation for tax purposes. You must determine its value, include it in employee wages, and withhold taxes on it.
Exceptions to the personal use rule
In some cases, personal use of a company vehicle is exempt from inclusion in employee wages and taxes.
De minimis fringe benefits
De minimis means too small for consideration. Personal use of a company vehicle is a de minimis fringe benefit if the employee uses the vehicle mainly for business purposes. Infrequent and brief side trips for personal reasons are excluded from the employee’s income.
Qualified nonpersonal use vehicle
If a company vehicle has a special design that makes personal use unlikely, any personal use is excluded from employee wages.
Vehicles in this category include:
- Marked police, fire, and public safety officer vehicles
- Unmarked vehicles used by law enforcement officers, if the use is officially authorized
- Delivery trucks with only a driver’s seat, or the driver plus a folding jump seat
- Moving vans
- School buses
- Passenger buses seating at least 20 people
- Animal control vehicles
- Construction or specially designed work vehicles (e.g., dump trucks, cement mixers, forklifts, garbage trucks)
- Refrigerated trucks
- Qualified utility repair vehicles
- Trucks with a loaded weight over 14,000 pounds
- Tractors and other special-purpose farm vehicles
Exclude from wages the use of a demonstration vehicle by a full-time automobile salesperson or sales manager within the sales area of the dealership. The use must be substantially restricted (e.g., no one else can use the vehicle, no vacation trips, no storage of personal items).
Personal use is limited to the greater of either a 75-mile radius of the dealership or the employee’s actual commuting distance.
You can get more information about the personal use exemption for demonstration vehicles in Publication 15-B.
Valuing personal use
You will include the fair market value of the employee’s personal use of the company vehicle in their wages. To determine the fair market value of the personal use, you can use a general valuation method or one of three special valuation rules to do a personal use of company vehicle calculation.
Apply the rules on a vehicle-by-vehicle basis. You can use different rules for different vehicles.
General valuation rule
With the general valuation rule, the fair market value is the price the employee would pay to lease the same or comparable vehicle in the same geographic area for the same length of time. You cannot use a cents-per-mile rate unless you can show that a lease was available for the type of vehicle in the same area at the same time.
The general valuation rule does not account for mixed use. It assumes the vehicle is used only for personal reasons. Because an employee will likely use the vehicle for both business and personal reasons, it may be advantageous to use a special valuation rule.
Special valuation rules
There are three special valuation rules:
- Commuting valuation
- Annual lease valuation
- Vehicle cents-per-mile
To use these three special valuation rules, you and your employees must keep thorough and timely reports of the personal use of company vehicles. You can learn more about this in the recordkeeping section below.
Commuting valuation rule
You might use the commuting valuation rule if an employee uses a company vehicle to commute to and from work.
The fair market value set by the IRS is $1.50 for a one-way commute and $3 for a round trip.
To use these rates, the following conditions must be met:
- You own or lease the vehicle.
- You provide the vehicle to the employee for use in your trade or business.
- You require the employee to commute in the vehicle for a noncompensatory reason:
- You have a written personal use of company vehicle policy prohibiting the employee (and their spouse and dependents) from using the vehicle for personal use other than commuting or de minimis errands.
- The employee is not a control employee.
- For nongovernment employers, a control employee is someone who:
- Is a corporate officer earning at least $105,000 (for 2017)
- Is a director
- Earns at least $215,000 (for 2017)
- Is a 1% owner
- Instead of the previous control employee rules, you might say all highly compensated employees are control employees. A highly compensated employee is someone who:
- Was a 5% owner at any time during the current or previous year.
- Received more than $120,000 in wages for the preceding year.
- For nongovernment employers, a control employee is someone who:
If more than one employee commutes in the vehicle, the $1.50 per one-way commute applies to each employee.
For more information about the commuting valuation rule, check Publication 15-B.
Annual lease valuation rule
With the annual lease valuation rule, you’ll determine the fair market value of the employee’s personal use by multiplying the annual lease value of the car by the percentage of personal miles driven.
Here are the steps for the annual lease valuation rule:
- Determine the fair market value of the vehicle on the first day you made it available to any employee for personal use. Whether you own or lease the vehicle, you must recalculate the value after four calendar years. If you transfer the vehicle to another employee, recalculate the value based on the vehicle’s value as of January 1 of the calendar year you make the transfer.
- For employer-owned vehicles, the fair market value is the total cost someone would pay for the vehicle, including sales tax and title fees.
- For employer-leased vehicles, determine the vehicle’s value using a nationally recognized pricing source (e.g., blue book).
- Find the annual lease on the Annual Lease Value Table in Publication 15-B. Reference the fair market value on the left. You will use the corresponding annual lease on the right.
- Calculate the employee’s percentage of personal miles driven. To get the percentage, divide the employee’s personal miles driven by the total miles driven.
- Calculate the fair market value of the employee’s personal use of the vehicle. Multiply the annual lease value by the percentage of personal miles driven.
If you provided fuel to the employee, add 5.5¢ per personal use mile.
For more information about the lease valuation rule and to get more resources, check Publication 15-B.
Annual lease valuation example
An employee, Matt, uses a car owned by your company. In 2017, Matt drives 30,000 miles. Of those, 5,000 are personal miles.
Let’s follow the steps above.
- Determine the fair market value of the vehicle on the first day it was available to Matt to use. Let’s say you determine that the fair market value of the car is $17,500.
- Find the annual lease value using the table in Publication 15-B. Because the fair market value is $17,500, the annual lease value is $4,850.
- Calculate Matt’s percentage of personal miles driven.
- 5,000 personal miles / 30,000 total miles = 0.17 or 17%
- Calculate the fair market value of Matt’s personal use of the vehicle.
- $4,850 annual lease value X 17% = $824.50
The fair market value of Matt’s personal use is $824.50. You will withhold taxes on this amount.
Vehicle cents-per-mile rule
With the vehicle cents-per-mile rule, you will determine the fair market value of the employee’s personal use by multiplying the personal miles driven by a standard mileage rate.
For 2017, the standard mileage rate is 53.5¢ per mile. The rate includes the costs of maintenance, insurance, and fuel. If you don’t provide fuel to your employees, you can reduce the rate by 5.5¢ per mile.
To use this rule, one of the following conditions must be met:
- You expect the employee to regularly use the vehicle for business throughout the year.
- At least 50% of the total mileage each year must be for business.
- The vehicle is generally used each workday to transport at least three employees to and from work, in an employer-sponsored commuting pool.
- The mileage test is met.
- The vehicle is driven by employees at least 10,000 miles per year (business and personal combined)
- The vehicle is primarily used by employees
You cannot use the cents-per-mile rule for a vehicle if its value on the first day of use exceeds an amount set by the IRS. For 2017, a vehicle cannot exceed $15,900 for passenger automobiles and $17,800 for vans and trucks. These values change every year.
If you use the cents-per-mile rule for a vehicle, you must use the rule for all following years. However, if the vehicle qualifies for the commuting rule, you can use that rule. And, if the vehicle no longer qualifies for the cents-per-mile rule, you can use another rule.
Vehicle cents-per-mile rule example
Megan, an employee, has access to a company-provided car. She drives 1,500 personal miles in 2017.
To get the fair market value of Megan’s personal use, multiply her personal miles by 53.5¢.
1,500 personal miles X $0.535 = $802.50
You will include $802.50 in Megan’s wages as the fair market value of her company-provided vehicle use.
To use the previous rules, you must keep adequate and accurate records. The employee should log the business use of the vehicle for each trip. The employee should list the mileage, the time and place of travel, and the business purpose of the travel.
If the employee’s business or personal use is the same for each period during the year (e.g., week, month, etc.) the employee can keep records during one period and you can use the projected totals for the whole year.
If an employee doesn’t give you records to differentiate between business and personal use, consider all use as personal use. Include the total value of vehicle use on the employee’s wages. The employee may be able to deduct the cost of the business use on their income tax return.
If you do include the entire use of the vehicle in the employee’s wages, you risk overpaying Social Security, Medicare, and FUTA taxes. It’s in your best interest to have employees record their business use so you don’t include that value in their wages.
Paying, withholding, and reporting
When withholding and reporting taxes for personal use of a company vehicle, follow the rules for withholding from and reporting on noncash fringe benefits.
When an employee uses a company vehicle for personal use, they immediately get that benefit. But, using the benefit and being paid for it are different.
You may treat the benefit as being paid on a pay period, monthly, quarterly, semiannual, annual, or other basis. This is when you include the fair market value in the employee’s wages. You must pay the employee for the benefit at least annually.
You can change the payment period at any time. The fair market value for all personal use benefits in a calendar year must be recorded by December 31 of that year.
You don’t have to use the same payment schedule for all employees. You might use a monthly basis for one employee but a quarterly basis for another.
Also, you don’t have to tell employees or the IRS about the frequency you choose to include the benefit value in employee wages.
Let’s say you include the benefit value semiannually in employee wages. An employee uses a company vehicle for personal use during the first half of the year. But you don’t include the benefit value in the employee’s wages until the very end of the first half of the year. This is when you consider the benefit paid to the employee.
If you want until the end of the year to include the entire benefit amount in the employee’s wages, the employee might not have enough wages to cover the taxes. If this happens, you are liable for uncollected Social Security and Medicare taxes, in addition to your own share.
Special accounting rule
There is a special accounting rule that can help with paying and reporting benefits.
You can treat benefits provided in November and December (or a shorter period during those two months) as being paid during the next year. This gives you extra time to value the personal use of a company vehicle.
There are some restrictions:
- This only applies to benefits provided in November and December, not all the benefits you treat as paid during these months. For example, you can’t roll over personal use of a vehicle that occurred in July.
- You must notify your employees that you are using this special accounting rule. You have the time between the last paycheck of the calendar year and when employees receive their Forms W-2 to tell them.
- If you use the special accounting rule for one employee’s personal use of a vehicle, you must use the rule for all employees. But, you don’t have to use the rule for other fringe benefits.
- You must use the same ending date in November and December for all employees. But, you don’t have to use the same ending date for all fringe benefits.
- If you use the special accounting rule, your employees must use the special accounting rule on their tax returns.
If you choose to use the special accounting rule, benefits shifted to the next year must use the valuation rules for the next year. For example, if the cents-per-mile rate increases, you need to use the new cents-per-mile rate when calculating the value of the benefits.
There are two methods for withholding.
You can add the fair market value of the employee’s personal use to their wages. You will then calculate withholdings on the total wages as you normally would.
Or, you can treat the amount as supplemental wages. You will withhold federal income tax on the amount at the applicable supplemental flat tax rate of 25% or 39.6%. You might also have to pay a state supplemental rate. Withhold FICA tax as normal.
With either method, subtract the benefit amount from the employee’s wages after you calculate the withholdings. If you don’t subtract the benefit amount, you’d essentially be paying the employee twice for the vehicle use. The employee would receive the value of the benefit when they use the vehicle, and they’d receive the value again in their wages. It’s important to subtract the benefit amount so you don’t give the benefit value twice.
You can choose not to withhold federal income tax on an employee’s personal use of an employer-provided vehicle. You can also choose to withhold federal income tax for some employees’ personal use, but not for others.
If you decided not to withhold federal income tax, you must notify affected employees in writing by January 31 of the year you make your decision, or within 30 days after the employee first gets the vehicle, whichever is later. If you change your mind about withholding, you must notify employees in writing again.
Even if you don’t withhold federal income tax, you are still required to withhold FICA tax.
Deposit the taxes according to deposit rules and your frequencies.
You will report the value of personal use of a company vehicle on Form 941 and the employee’s Form W-2.
PUCC on Form 941
You use Form 941 to report employee wages, federal income tax withholding, and withholdings and contributions for FICA taxes. Form 941 is a quarterly form.
Report the fair market value of an employee’s personal use on Form 941 in the quarter it is considered paid. You must report the fair market value of the benefit for a year no later than the fourth quarter Form 941 for that year.
PUCC on W-2 form
You must report the value of the personal use of the company vehicle on the employee’s Form W-2. Include the amounts in Boxes 1, 3, and 5. Also, report the amounts you withheld in Boxes 2, 4, and 6.
If you choose not to withhold federal income tax, you must still include the fair market value of the benefit in Box 1.
If you treat all employee use of a vehicle as personal use, include the total benefit amount in Boxes 1, 3, and 5. Also, report the benefit amount in Box 14 or a separate statement to the employee.
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