Payroll Rules For Personal Use Of A Company Vehicle

A common benefit in many U.S. companies today is the use of a company owned vehicle. However, though a common benefit, an employee's personal use of such a company owned and provided vehicle is generally a taxable fringe benefit and the taxation regulations can be extremely complex. The taxable benefit amount, which is subject to full federal taxation (FIT, social security, Medicare and FUTA taxes) as well as state taxation, can actually be determined by several methods. The state taxation will vary from state to state.

The methods, known as the general valuation method and the special valuation methods, are based on the type of vehicle and value, the type of employee, and the purpose for the employee using the vehicle. The taxable compensation resulting from personal use of a company owned vehicle may be treated as paid each pay period, monthly, quarterly, semi-annual or annually, as long as it is treated as paid no less than annually. For those employers who use it, this fringe benefit can be calculated using the special accounting rule (explained below). IRS allows employers to use the special accounting rule for taxing and reporting certain noncash benefits. The special accounting rule allows employers to treat noncash taxable fringe benefits provided to employees during November and December of one year as being paid in the following year. The special accounting rule gives employers additional time to calculate the taxable value of noncash fringe benefits. However, there are some restrictions that apply to employer's use of the special accounting rule:

• The rule applies only to noncash fringe benefits provided during November and December
• The employer does not have to formally elect to use the special accounting rule
• The employer must notify employees of its decision during the period beginning with the employee's last paycheck of the calendar year and ending with the employee's receipt of the Form W-2 for that year
• The employer can choose to use the special accounting rule for some benefits and not others, but if the rule is used for one benefit, it must be used for all employees receiving that benefit
• The employer can use different ending dates during November and December for each benefit
• An employee can use the special accounting rule on his or her personal tax return only if the employer uses it, and must use the rule if the employer uses it
• The special accounting rule may not be used if the noncash fringe benefit is personal property normally held for investment or real property
• The rule also cannot be used to value benefits such as GTL

Although the value of personal use of a company car is taxable for FIT, an employer may choose not to withhold the FIT. The employer must, however, withhold social security and Medicare taxes on the value of the employee's personal use of a company vehicle. This choice does not have to be made for all employees. If the employer chooses to not withhold FIT, it must do it in a way that the affected employee will be aware of it. For example: the employer can notify the employee of the choice by including a notice with the employee's paycheck or by displaying a notice on the company bulletin board. There are exceptions to the taxation rule for certain vehicles or employees where the personal use of company vehicle is not taxable. They are:

• Working Condition Fringe This qualifies as tax exempt because under the IRS tax laws, any employer provided “working condition fringe benefit“ that the employee would be entitled to claim as a business-related expense deduction is nontaxable.
• De Minimis Benefit This is a fringe benefit that the IRS says is just too small to keep track of. An example is the side trip to the post office on the way to a business meeting.
• Qualified Nonpersonal Use Vehicle Vehicles that are not likely to be used more than minimally for personal use because of their special design

Types of nonpersonal use vehicles include:

• Clearly marked police cars
• Ambulances and hearses
• Delivery trucks with only driver seating
• School buses

In addition, pickup trucks and vans that have a loaded gross vehicle weight not exceeding 14,000 pounds can also qualify as nonpersonal use vehicles. The vehicles must have been specially modified in such a way that substantial personal use is unlikely. The vehicles must have permanently affixed decals or special painting or other advertising for the employer's business. The vehicle must also meet the following qualifications: For Pickup Trucks:

• The truck must either be specially equipped with such equipment as an hydraulic lift gate, a power winch, an electric generator, a boom or crane used to tow cars, or
• Be used primarily for off-road transporting in connection with construction, manufacturing, farming mining, etc.

For Vans, the van must:

• Have seating for only the driver and one other person
• Have permanent shelving filling most of the cargo area or an open cargo area that constantly (during both working and nonworking hours) carries materials, equipment used in the employer's business, or merchandise
• Automobile Dealerships Use of demonstration automobiles by full time salespersons within the dealership's sales territory is considered nontaxable personal use if both the following restrictions are clearly adhered to:
  • It may not be used for personal vacations
  • No storage of personal possessions in the car
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