Using the Company Car

By Stefan Schumacher, editor of The Payroll Blog

If a small business owner or one of his or her employees uses a company car for personal use, this is considered taxable income with a few exceptions.

The major exceptions to this rule include when the company vehicle is unlikely to be used because of its design such as a school bus or police car it is not part of the employee’s income.

Demonstration cars used by automobile salespeople do not count as income assuming its personal use is substantially restricted.

The Value of Vehicle Use

To determine the amount that should be reported as taxable income, you first have to calculate the fair market value of the vehicle use. Businesses can choose from a variety of valuation options. The general valuation method determines the fair market value to be the amount that a person would pay to lease the same or comparable car in the same area for the same time.

Under the annual lease valuation method, the fair market value of personal car use is determined by multiplying the annual lease value by the percentage of personal miles driven.

The vehicle cents-per-mile method is probably the most straightforward. The business owner simply multiplies the IRS’ business mileage rate by the number of personal miles driven.

How Does Personal Use of a Company Vehicle Affect Payroll?

The various valuation methods all have their own set of requirements. Those involved with payroll must keep up-to-date with the changing regulations.

For example, when a company vehicle is used for both business and personal use, employees must keep accurate records of usage so that the people calculating payroll can address tax liabilities accordingly.

Records should include mileage driven, time and place of travel and business purpose of the trip. Employers can opt to designate all use of company-provided cars as personal by including the vehicle use value in their staff’s income. However, this option runs the risk of the employer overpaying Social Security and FUTA taxes if some of the car’s use was not taxable and the employees’ income does not exceed the Social Security of FUTA wage thresholds.

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