By Stacie Clifford Kitts, CPA
Do you have an employer provided automobile? If so, here are some things to know.
The law provides that the personal use of an employer-provided automobile represents additional compensation to an employee. This compensation is also known as a taxable fringe benefit.
Many employees are surprised to learn that when you use a business vehicle to commute to and from work or for any other personal use, you are generating additional taxable income that will be included on your W2.
No, sorry you did not get an unexpected raise. This portion of our tax code is just another example of how nothing in life is free. Not even an innocent trip to the park, or maybe that parent teacher conference – at least not if you got there in the company car.
Anyway, since this additional income along with the appropriate payroll taxes is determined annually by your employer, it is important that you carefully document your business versus personal use of the vehicle. After all, there is no need to pay more tax than is necessary. At a minimum, you should maintain a daily log that shows the miles you have driven, the business purpose for your trip, and where you were going.
You may also want to discuss the need for additional income tax withholding with your CPA or qualified tax preparer to make sure there are no tax surprises during tax filing time.
Now, the calculation of the income element for your visit to that parent teacher conference or other personal trips can be based on a couple of methods. Your employer may choose any one of the following to calculate your taxable personal use:
Your employer will multiply the total miles you used the vehicle for personal use by the standard mileage rate.
In order to use this method certain requirements must be met. You can check out the details of this method in Publication 15-B Employer’s Tax Guide to Fringe Benefits.
Lease Value Rule
If your employer uses this method, your employer will determine the percentage of personal use by dividing the total miles driven by the amount of personal miles driven. The resulting personal use percentage will then be multiplied by the vehicles “lease value.” The IRS provides the Annual Lease Value table that will be used in this calculation. Additional calculation information can be found at Publication 15-B.
If your employer provides a vehicle for the purposes of commuting such as a commuter vanpool, the taxable benefit is calculated by “multiplying each one-way commute by $1.50.”
One final note for S corporation shareholders who receive a W2 and who have a company vehicle, if at any time during the year you owned more than 2% of the outstanding stock of your S-Corp you are treated like a partner and not an employee in regards to the application of these rules. Check with your CPA or tax preparer for more information.