When To Report The Personal Use Of A Company Vehicle As Employee Income

Posted on: 5 January 2016

Some employees who drive a company car occasionally use the vehicle for personal use. Employers whose vehicles are sometimes driven for personal use may need to include the personal use of a company car as additional income to the employee.

If a vehicle provided to an employee is used totally for business purposes, none of its use is taxable to the employee. If a company car is driven for both business and personal use, the portion for personal use may be taxable to your employee, requiring withholding for Social Security and Medicare taxes. Passenger cars are more likely to be used for personal use than trucks that have been modified for exclusive business use.

Exempt vehicles

Certain types of work vehicles are unlikely to be used for personal purposes and result in no added employee income. Examples of nonpersonal work vehicles include the following:

  • Delivery truck with minimal seating
  • Utility truck
  • Public safety vehicle

Pickup trucks and vans may qualify as nonpersonal work vehicles if they have been modified for work purposes and have permanent signage on their exterior. A full-time auto salesperson can drive a demonstrator car without incurring any added income if there are restrictions on personal use. For other vehicle types, you may have to consider the personal portion of vehicle use as employee income.

Standard passenger vehicles

There are generally two different methods to determine the amount of employee income resulting from the personal use of a company car. One method is based on the cost of leasing an equivalent vehicle. The other method applies a fixed rate to each personal mile driven.

The fair market value of a lease is the amount that it would cost to lease a car of comparable value. Any percentage of vehicle use that is personal is multiplied by the lease value to arrive at the amount of employee income.

To use the mileage method, the value of your company vehicle must be within a specific limit set by the IRS. A standard IRS mileage rate is multiplied by the number of personal miles. Regardless of which method is used, the income attributed to your employee is treated similarly to wages.   Employee income due to the personal use of a company car is subject to withholding for income tax, Social Security tax, and Medicare tax. As with wages, your business is responsible for making a matching contribution for Social Security and Medicare taxes. Contact an accountant, like Dale K. Cline, CPA PLLC,  for further information on the tax consequences of employees driving company vehicles.