It is sometimes helpful to have the use of an employer-provided vehicle in the course of doing business. In many cases, personal use is also allowed but personal use is a taxable fringe benefit, according to Payroll-Taxes.com. Withholding taxes for this non-cash benefit is the responsibility of the employer.
This withholding process is complicated with the FMV of the vehicle not being determined by the actual cost of the vehicle, according to Payroll-Taxes.com. The FMV is calculated based on what an employee would pay for leasing a comparable vehicle. The fair market value (FMV) of a non-cash fringe benefit should be reviewed annually, although some employers recalculate this value monthly.
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The provider is allowed to withhold federal income taxes, FICA taxes (Social Security and Medicare), and FUTA taxes from an employee’s compensation, according to Payroll-Taxes.com. The FMV of the benefit may be added to the employee’s regular compensation and the necessary taxes withheld. All fringe benefits used are taxable based on the fair market value of the benefit which can be reduced by two amounts:
- Any amount that the law excludes from compensation
- Any amount that the recipient pays for the benefit
Being a non-cash benefit, a special accounting rule can be applied. An employer can add the value of the benefit for the last two months of a calendar year with the first ten months of the following year. If the employer applies this special accounting rule to one employee, they must apply it to all employees receiving similar benefits, according to Payroll-Taxes.com.
This is an example provided by Payroll-Taxes.com. An employer may not be able to determine FMV of personal use of an employer-provided vehicle until the employee reports their mileage in the following month. So using the FMV of the benefit for November (year1) in their example, an employer can calculate benefit value for November 1 (year1) to October 31 (year2). The employer must also inform employees that this special accounting rule is being applied to them because the employees must also use the same rule.
In the some cases, employees are provided company-owned vehicles without them having to document personal use. These employees also have the entire FMV of the vehicle included in their income according to Payroll-Taxes.com. They then have the option of calculating and deducting the vehicle’s business use on their personal tax return.
There are three primary methods to determine the FMV of a vehicle according to Payroll-Taxes.com. The Commuting Rule is used when the personal mileage on an employer-provided vehicle includes commuting to and from work only. Each one-way commute is valued at $1.50 and can be included in the employee’s wages or reimbursed to them. No employee mileage records are required with this method but four requirements must be satisfied by the employer.
- The vehicle is provided to the employee by the employer for use in an employer’s trade or business.
- The employee is not allowed to use the vehicle for personal uses, “other than for commuting or de minimus personal use (such as a stop for a personal errand on the way between a business delivery and the employee’s home),” specified as written policy by the employer.
- The employee does not use the vehicle for personal purposes in reality.
- The employee is not a control employee as defined on Page 19 of Publication 15-B.
The Cents-Per-Mile Rule is based on the standard 2006 mileage rate of 44.5 cents per mile, according to the Internal Revenue Service (IRS). The employer must be reimbursed for all personal miles driven in an employer-provided vehicle or the value can be added to the employee’s taxable income, according to Payroll-Taxes.com. The standard mileage rate can be reduced no more than 5.5 cents if fuel for the vehicle is provided by the employee. Five requirements must be satisfied to use this rule.
- The maximum value of employer-provided vehicles first made available to employees for personal use is $14,800 for a passenger automobile and $16,300 for a truck or van, according to the IRS. The fleet-average valuation rule sets a maximum value at $19,600 for a passenger automobile and $21,300 for a truck or van, according to the IRS.
- Business mileage must be at least 50 percent of the annual mileage.
- Actual mileage must be at least 10,000 annually.
- Employees must be the primary users of the vehicle.
- The same method must be used consistently for later years except for specific circumstances outlined in Publication 15-B.
The value of maintenance and insurance is included in the cents-per-mile rate, according to Payroll-Taxes.com. Employee-paid maintenance and/or insurance reduces the value of personal use by the value of expenses actually shown in employee-provided receipts.
The Annual Lease Value method calculates how much of the vehicle’s FMV can be excluded from employee income as a working condition fringe benefit. The net effect is the same as figuring the personal use of the vehicle to start with, according to Payroll-Taxes.com. The annual lease value does not include fuel expense.
If the employer provides all gasoline, the value of personal use can be calculated using the FMV of gasoline or at a rate of 5.5 cents per mile, according to Payroll-Taxes.com. Also if the employee is not required to keep a mileage log, the value of the entire lease, plus the value of gasoline, is taxable to the employee.
The IRS provides additional information concerning employer-provided vehicles in Internal Revenue Bulletin 2005-32 dated August 8, 2005. The IRS provides more guidance on this process in Publication 15-B, Employer’s Tax Guide to Fringe Benefits.