Employers may soon have another, less costly, option to calculate the tax impact of personal use of an employer-provided vehicle. Under recently proposed regulations, the IRS will allow vehicles with a fair market value of up to $50,000 to use a cents-per-mile rule that was previously reserved for lower value vehicles.
What does this mean for employers and employees?
Generally speaking, if an employer provides an employee with a vehicle and the employee drives it for personal reasons, the value of any personal use must be quantified and included in that employee’s W-2 income.
As it currently stands, only vehicles valued at $12,800 or less are able to use the cents-per-mile option to calculate the required additional income. Generally, all other vehicles use the annual lease value amount as specified by IRS tables based the vehicle’s fair market value as the additional W-2 income. The IRS now proposes to raise that vehicle value threshold for use of the cents-per-mile method to $50,000.
When less income is reported on W-2s, employees will pay less in federal income and FICA taxes and also state unemployment taxes. Employers will benefit by paying less on the employer portion of FICA and unemployment taxes, plus they can promote the reduced reportable income as an additional employee benefit.
Here’s a demonstration of potential tax savings for an employee who is provided a vehicle with a fair market value of $49,999 and drives 10,000 miles in one year (5,000 of which were personal use miles) assuming a tax rate of 22 percent:
Which method should my company use?
Employers should consider all available valuation options and rules to find the one that best matches their unique financial circumstances. The cents-per-mile option is not automatically the most advantageous. For example, companies with more than 20 vehicles may be better off using the fleet market value. The team of tax advisors at RKL can help your company find the right strategy. Contact us today to get started.