As year-end approaches, it is time to gather the information needed to properly report certain taxable fringe benefits provided to employees during 2022.
Taxable fringe benefit for the value of personal use of company-owned vehicles
The value of an employee’s use of a company-owned vehicle is a taxable fringe benefit reportable on federal Form W-2 and taxable for federal income tax purposes.
This fringe benefit is currently not taxable for Pennsylvania state or Pennsylvania local income tax purposes.
There are several methods to calculate the value of an employee's personal use of a company-owned vehicle:
Annual Lease Value Method (most common)
The Annual Lease Value is based on the Automobile Market Value, which is the Fair Market Value of the automobile on the first date it is available to any employee for personal use. The value is determined using Annual Lease Value Tables published by the IRS. The amount of taxable fringe benefit is the Annual Lease Value amount multiplied by the percentage of personal miles over total miles driven by the employee for the year.
Fair Market Value (FMV) for Purchased Vehicles
Fair market value (FMV) is the amount a person would pay to buy the automobile from a third party in an arms-length transaction and includes purchase expenses such as sales tax, title fees and other purchase expenses.
Fair Market Value (FMV) for Leased Vehicles – Safe-Harbor Rules
Safe-harbor rules allow FMV to be your purchase cost, including sales tax, title fees, and other purchase expenses. For leased vehicles, the safe-harbor FMV can be either
- manufacturer's invoice price plus 4%
- manufacturers' suggested retail price minus 8%
- the retail value of the automobile reported by a nationally recognized pricing source.
Additional Expenses and Excluded Items
The annual lease vadoesn'tsn't include the value of fuel you provide to an employee for personal use, regardless of whether you offer it, reimburse its cost, or have it charged to you. You must include the value of the fuel separately in the employees' wages. You can value the fuel you provided at FMV or 5.5 cents per mile for all miles driven by the employee. If you provide any service other than maintenance and insurance for an automobile, you must add the FMV of that service to the annual lease value of the car to figure the value of the benefit.
4-Year Lease Term
The annual lease values in the table are based on a 4-year lease term. These values will generally stay the same for the period that begins with the first date you use this rule for the automobile and ends on December 31 of the fourth full calendar year following that date.
The annual lease value for each later 4-year period is determined by the FMV of the automobile on January 1 of the first year of the later 4-year period. If the special two-month accounting rule described below is used, figure the annual lease value for each later four-year period at the beginning of the special accounting period that starts immediately before the January 1 date of the first year of the later 4-year period.
The taxable fringe benefit to the employee is determined by multiplying each one-way commuting miles by the number of one-way commuting trips by $1.50.
This method is only available if all the following requirements are met:
- You provide the vehicle to an employee for use in your trade or business, and for bona fide non-compensatory business reasons, you require the employee to commute in the vehicle.
- You establish a written policy that doesn't allow the employee or any individual whose use would be taxable to the employee to use the vehicle for personal purposes other than for commuting or de minimis personal use.
- The emplodoesn'tsn't use the vehicle for personal purposes other than commuting and de minimis personal use.
- If this vehicle is an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van), the employee who uses it for commutisn'tsn't a control employee.
A control employee is defined as:
- A board or shareholder-appointed, confirmed, or elected officer whose pay is $120,000 or more.
- A director.
- An employee whose pay is $245,000 or more.
- An employee who owns a 1% or more equity, capital, or profits interest in your business.
The value using the cents-per-mile method for 2022 is determined by multiplying the total miles the employee drives the vehicle for personal purposes by the applicable 2022 standard mileage rate. The rate was $0.585 from 1/1/2022 through 6/30/2022 and increased to $0.625 from 7/1/2022 through 12/31/2022.
This method can only be used:
- You reasonably expect the vehicle to be regularly used in your trade or business (at least 50%) throughout the calendar year (or for a shorter period during which you own or lease it).
- The vehicle is driven at least 10,000 miles during the year by employees
- vehicle'sle's fair market value does not exceed $56,100 if first made available for use in 2022. See IRS tables for previous threshold limits.
Special Accounting Rule for Calculating the Value of All Non-Cash Fringe Benefits: Two-Month Accounting rule
Under a special rule, benefits provided in November and December, or a shorter period in the last two months of the year, may be treated as paid in the following year. You may only treat the value of benefits provided in the previous two months as paid in the subsequent year. You do not have to notify the IRS that you are using this special accounting rule.
An employer may use this rule for some fringe benefits and not others. The special accounting period can be different for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, it must use it for all employees who receive it.
Additional Compliance Documents for employee use of company-owned vehicles
In addition to the information included, the following are other suggested compliance documents to consider regarding employee use of company-owned vehicles.
- Employer Notification of Elections Concerning the Personal Use of Employer-Provided Automobiles (Employer Statement) – Employee acknowledgment of the taxable fringe benefit from employee’s personal use of company-provided vehicle
- Vehicle Information Summary – Non-Cash Fringe Benefit Computation – form for the employee to provide information necessary to calculate the value of personal use of a company-provided vehicle.
- Written Policy Statement – Prohibiting Personal Use of Vehicles – employee consent to company policy prohibiting personal use of company-owned vehicles.
- Written Policy Statement – Prohibiting Personal Use of Vehicles Other than Commuting – employee consent to company policy prohibiting personal use of company-owned vehicles other than for commuting.
Group Term Life Insurance Fringe Benefit
Another common employee fringe benefit is Group Term Life Insurance.
Under current tax law, an employer can provide up to $50,000 of group term life insurance coverage to an employee tax-free. Premiums for amounts provided more than $50,000 of coverage are taxable to the employee as wages and are subject to Social Security tax withholding.
However, the taxable group term life premiums are not subject to federal income tax withholding and are generally not subject to FUTA taxes if paid under an employer plan. Also, the premiums are usually not taxable for Pennsylvania or PA local income tax purposes. If you are using a payroll service, these amounts must be reported, and the appropriate taxes must be withheld by the last pay period of 2022.
Please don't hesitate to contact our team with any year-end tax reporting questions.