Organizations that own or lease vehicles for employee use must report the value of the employee’s personal vehicle use as income on the employee’s Form W-2. Here is what your organization should know about the reporting process.
Personal use of an employer-provided vehicle can include the following:
- Commuting between a personal residence and work location (except for infrequent de minimis use, i.e., one day per month)
- Local transportation unrelated to the organization’s trade or business (small personal detours while on business aren’t considered personal use)
- Vacation or weekend use
- Use by individuals other than company employees
Employee use of “qualified non-personal use vehicles” is considered a working condition fringe benefit and not personal use. Qualified nonpersonal use vehicles include:
- Police, fire and public safety vehicles, both marked and unmarked
- Vehicles designed to carry cargo with loaded gross vehicle weight exceeding 14,000 pounds
- School buses and buses with capacity for more than 19 passengers
- Delivery trucks with seating for the driver only
- Flatbed trucks, qualified moving vans and qualified specialized repair trucks
- Certain specially modified pickup trucks
- Certain other special use vehicles
The value and personal use of demonstrator cars by persons meeting the definition of a “full-time automobile salesperson” may be excludable if certain restrictions on personal use are in force. In addition, when qualified employees are allowed to use company vehicles for commuting due to unsafe conditions, the value of commuting mileage can be calculated at $1.50 per commute (additional conditions apply).
Record Keeping & Documentation
Detailed records documenting business and personal use should be maintained by employees for vehicles used both for business and personal purposes. Records should include mileage, date, destination and purpose for each trip. Absent detailed records to substantiate business use of the vehicle, the value of all automobile use must be included in the employee’s W-2 compensation. If the employer includes the entire value of the vehicle use in the employee’s compensation, the employee can claim miscellaneous itemized deductions for the part of the value substantiated as business use plus actual costs incurred in operating the vehicle for business purposes.
Safe Harbor Substantiation Rules
Detailed records of employee use of vehicles aren’t required if all the following conditions are met:
- The vehicle is owned or leased by the employer and provided to the employee for use in the employer’s business
- The employer has established a written policy prohibiting personal use other than de minimis use (and commuting if vehicle is only used personally for commuting)
- The employer reasonably believes the vehicle isn’t used for personal use, except for de minimis use (and commuting if vehicle is only used personally for commuting)
- The employer accounts for the commuting use by including the commuting value in the employee’s wages
Additional requirements apply based on specific vehicle use:
- For vehicles not used for personal purposes:
- When not in use, the vehicle is kept on the employer’s premises
- No employee using the vehicle lives at the employer’s business premises
- For vehicles not used for personal purposes except commuting:
- For bona fide noncompensatory reasons, the employer requires the employee to commute to or from work in the vehicle
- The employee isn’t a control employee (as defined by IRS regulations)
Automobile Valuation Rules
There are three methods for calculating the value received by an employee for personal use of an employer-provided vehicle. The method selected depends on several factors, including the type of vehicle, its specific use, mileage and organizational policies and expectations. The table below offers more details.
Payroll Tax Considerations
- Reporting Frequency – Under the special accounting rule, wage additions can be reported as frequently as on a per-pay-period basis and on any frequency up to and including an annual basis, keeping in mind that frequency determines payroll tax deposit due dates.
- Federal Withholding Tax – Federal withholding tax on fringe benefit wage additions can be calculated as a combined total with regular wages or withheld at a flat 25 percent rate. When adding personal use of an employer-provided highway motor vehicle, employers can choose not to withhold federal income tax if the employee has been notified that the employer has chosen not to withhold federal income tax and the value is properly reported on a timely filed Form W-2.
- Employee Portion of Social Security and Medicare Tax – The employee portion of Social Security and Medicare tax may be paid by the employer or employee. If paid by the employer, tax paid should be included in the employee’s income.
The rules above should be considered in the record keeping and reporting of employee use of employer-provided vehicles. In addition, employers should:
- Review list of company-owned/leased vehicles and determine whether vehicles are being used by employees for personal purposes
- Ensure personal and organizational use of company vehicles is substantiated by appropriate records
- Review fringe benefit valuation methods and select appropriate valuation method
- Determine federal withholding tax treatment and responsibility for Social Security and Medicare taxes
- Identify benefit reporting frequency, schedule payroll reporting adjustment(s) and verify proper presentation on payroll tax returns and W-2s
Carefully drafted policies, maintenance of appropriate records and attention to rules for reporting the value of employee personal use of employer-provided vehicles can help avoid penalties for failure to comply.