Employee Personal Use of Business Vehicles
As your tax and business advisor, we want to remind you of the rules regarding employee personal use of business vehicles. Keep in mind this article does not address owner personal use of business vehicles, which gets handled a bit differently and which we’ve addressed many times recently, including every year at tax time. This message now relates to employees and owner-employees who own less than 2% of the business (if your business does not have any non-owner employees, you can disregard this article). If your business owns vehicles that are used personally by your employees, that personal use is taxable to your employee as compensation and is required to be included in their annual W-2, or to be reimbursed by them to the business.
First, let’s define personal use. Personal use includes:
- Driving the vehicle home after hours (which is considered commuting and is not a qualified business use).
- Family trips.
- Personal errands.
- Any use by the employee’s spouse or dependent.
Personal use does not include driving from one jobsite to another, running errands for the business, or de minimis personal use. De minimis use is when the employee takes a small personal detour while using the vehicle for business purposes, like running to the bank on their way back to the office from a business meeting. Keep in mind that if these vehicles are fitted with signs or decals advertising your business, this does not change the nature of business versus personal use, even though your business is receiving cheap advertising when these vehicles are being driven around town.
Often, an employee will have business and personal use of the same vehicle. In that case, they need to substantiate their business use. There are many ways to track business use, including a manual mileage log (click here to see a sample), a smartphone app, or other system. As the employer, you need to require your employees to keep these records, to provide them to you periodically (at least annually, but preferably more often), and you need to keep those records. Any miles driven on business vehicles that are not substantiated as business expenses are considered to be personal, and therefore are subject to employee and employer payroll taxes and income taxes.
There are 3 different methods the IRS allows to value the additional compensation you must report for your employees. But, the computation methods are beyond the scope of this article. Generally, you calculate this on a per-vehicle basis, and can use different methods for different employees. If you have employees who meet these criteria and you are not currently following these rules, contact us to help you get in compliance. If you want to start this for the 2013 W-2’s, you will need to know the total personal miles for your employees on business vehicles for the year before we can help you with this process. You also most likely will need to know the total expenses per vehicle for the year.