If you’re an employer offering a company vehicle, or an employee driving one, it’s important to understand what happens when that car isn’t being used strictly for work. Using a company car to give rides to friends or family, do side gigs, or drive during off-hours like nights, weekends, or vacation time can cause tax problems for both you and the company. It also may not be covered by insurance and could put the company at risk if something goes wrong.
The IRS considers personal use of a company vehicle a taxable fringe benefit. That means both employers and employees have responsibilities when it comes to tracking and reporting the vehicle’s use accurately.
What Is “Personal Use” of a Company Vehicle?
The rule is straightforward: if it’s not business-related, it’s personal use. In other words, a person’s daily commute is personal use, even though your employee is driving to work. Weekend errands, picking up lunch, or letting a spouse borrow the car all fall into this category.
This matters for two key reasons. First, the IRS treats personal use as taxable income, and if you don’t track business versus personal miles, they’ll assume every mile was personal, which creates a bigger tax burden for both you and your employee. Second, without clear vehicle use policies, you risk employees unknowingly violating company rules, which can create HR issues and potential liability for your business.
Why This Matters for Payroll and HR
Once personal use is established, employers are required to:
- Calculate the value of that benefit
- Include it in the employee’s income
- Withhold the appropriate taxes
This includes federal income tax, Social Security, and Medicare.
As a payroll provider, we see this issue come up regularly, especially at year-end when it’s time to issue W-2s. Getting it right throughout the year helps avoid last-minute scrambles and potential penalties.
Why a Mileage Log Matters
The IRS expects employers and employees to keep detailed records of business and personal mileage, whether it’s a spreadsheet, a paper logbook, or a mileage-tracking app. As long as the log includes dates, destinations, mileage, and the purpose of each trip, you’re in good shape.
Tip: If neither you nor your employee is keeping a log, you may be over-reporting or underreporting the taxable benefit. Neither is good.
Simple Ways to Calculate Personal Use Value
There are three IRS-approved methods for determining the value of personal use:
The Annual Lease Value Method
This is the most commonly used approach. The IRS provides a table that assigns a dollar value to the vehicle based on its fair market value (FMV) when it was first made available to the employee.
- That annual lease value is then multiplied by the percentage of personal miles driven in the year.
- Example: If the vehicle’s annual lease value is $5,000 and 25% of the mileage was personal, the taxable benefit is $1,250.
The Cents-Per-Mile Rule
If the vehicle is regularly used and expected to exceed a certain mileage each year, the IRS allows employers to use a flat rate (e.g., 67 cents per mile in 2024) to calculate the value of personal use.
- Example: If your employee drove 1,000 personal miles, their taxable benefit would be $670.
The Commuting Rule
This simplified method assigns a flat $1.50 value per one-way commute. It’s only available if certain conditions are met, including:
- A written company policy that prohibits other types of personal use
- The vehicle is used primarily for business
- Employees do not have control over vehicle availability for personal use
Choosing the right method depends on how the vehicle is used and documented.
Avoid Year-End Surprises by Planning Ahead
One of the most common concerns we hear from business owners is about the timing: when and how to report personal use of company vehicles so it appears correctly on the W-2. To ensure it’s included, that information needs to be added to payroll before the final paycheck of the year is processed. If it’s submitted after year-end, it means reopening your payroll records, and that comes with extra fees for reprocessing.
Here’s how many employers handle it: even though the IRS requires mileage to be tracked for 12 months, those months don’t have to follow the calendar year. So, some businesses start their mileage year in December and end it in November of the following year. This gives them a full 12-month log that they can finalize and report in early December, well before year-end deadlines, and without incurring reprocessing costs.
If you switch to this method, there will be a one-time adjustment: one year will only include 11 months of data. That’s okay, as long as you document the policy change and consistently apply the new tracking cycle moving forward.
Shift Gears with Commonwealth Payroll & HR’s Support
Instead of scrambling in December, set up proper tracking systems now. Good mileage records protect you from IRS headaches and keep your company policies clear for everyone. Our HR team can walk you through simple tracking methods that actually work, and our Expense Management tool makes it easy for employees to log their miles without the usual hassle. We’re not just here for payroll questions; we’ll help you tackle these compliance issues before they become problems. Contact us today and let’s get your company vehicle policies sorted out so you can focus on running your business instead of worrying about audits.
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