The value of an employee’s use of a company owned vehicle is a taxable fringe benefit reportable on the federal Form W-2 and taxable for federal income tax purposes. Now is the time to start preparing for year-end tax reporting by gathering information for taxable fringe benefits. Taxable fringe benefits must be calculated and included in the annual Form W-2 before the end of the year.
Personal use of company vehicles and employer provided group term life insurance are the two most common types of taxable fringe benefits.
More information about these two common fringe benefits is provided below:
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 the federal Form W-2 and taxable for federal income tax purposes.
The “value” of employee’s personal use of a company owned vehicle can be calculated in one of the following ways:
Lease Value Rule (most common)
There are three steps to using the annual lease value of an automobile:
Determine the FMV of the automobile on the first date it is available to any employee for personal use.
Use the Annual Lease Value Tables (published annually by the IRS) to determine the annual lease value.
Multiply the Annual Lease Value amount by the percentage of personal miles over total miles driven by the employee for the year.
Fair Market Value (FMV) for Purchased Vehicles
The Fair Market Value (FMV) is the amount a person would pay to purchase the automobile from a third party in an arms-length transaction and includes all purchase expenses such as sales tax, and title fees.
Fair Market Value (FMV) for Leased Vehicles – Safe-Harbor Rules
Safe-harbor rules allow FMV to be your cost of purchase including sales tax, title fees, and other purchase expenses. For leased vehicles, the safe-harbor FMV can be either 1) the manufacturer’s invoice price plus 4% 2) the manufacturer’s suggested retail price minus 8%, or 3) the retail value of the automobile reported by nationally recognized pricing source if that retail value is reasonable.
Additional Expenses and Excluded Items
The annual lease value does not include the value of fuel you provide to an employee for personal use, regardless of whether you provide it, reimburse its cost, or have it charged to you. You must include the value of the fuel separately in the employee’s wages. You can value fuel you provided at FMV or at 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 automobile 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.
Commuting Rule
Using the Commuting Rule, the value of a vehicle provided to an employee for commuting use is calculated by multiplying each one-way commute by $1.50. This amount is included in the employee’s wages or reimbursed by the employee.
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 under which you don’t allow the employee, nor 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 employee doesn’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 commuting isn’t a control employee.
A control employee is defined as:
A board or shareholder-appointed, confirmed, or elected officer whose pay is $135,000 or more.
A director.
An employee whose pay is $275,000 or more.
An employee who owns a 1% or more equity, capital, or profits interest in your business.
Cents-Per-Mile Method
Under the Cents-per-Mile method, the value of a vehicle you provide to an employee for personal use is determined by multiplying the total miles the employee drives the vehicle for personal purposes by the applicable 2024 standard mileage rate. For 2024, the standard mileage rate is 67 cents per mile. Any use of the vehicle other than for use in trade or business is considered to be personal use.
This method can only be used if either of these requirements is met:
You reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year (or for a shorter period during which you own or lease it).
The vehicle meets the mileage test (which is driving the vehicle at least 10,000 miles during the year and used primarily by employees).
This method cannot be used if the value exceeds $62,000 (for 2024), when first made available to any employee for personal use.
Special Accounting Rule for Calculating the Value of All Non-Cash Fringe Benefits: Two Month Accounting Rule
Under a special rule, the value of taxable noncash fringe 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 during the last 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 does not need to be the same for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, it must use the rule for all employees who receive that benefit.
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 of group-term life insurance provided to employees beyond $50,000 of coverage are taxable to the employee as wages (reduced by the amount the employee paid toward the insurance) and are subject to Social Security and Medicare taxes and you may, at your option, withhold federal income tax. The taxable group term life premiums are generally not subject to FUTA taxes if paid under an employer plan. The amount to be included in the employee’s wages is calculated using the monthly cost for the employee’s age on the last day of the employee’s tax year per the IRS Table for the amount of life insurance over $50,000 by the number of months of coverage. The calculated amount must be reported, and the appropriate taxes withheld by the last pay period of 2024.
If you would like us to calculate the amounts that need to be included in your payroll, please provide our office with the following information before you run your last payroll for 2024:
Employee Name: ______________________________
Amount of Coverage: __________________________
Premiums Paid for 2024: ________________________
Important Note – If Herbein + Company, Inc. Prepares Forms W-2 for Your Business
Please note that Forms W-2 prepared by Herbein + Company, Inc. cannot be processed until necessary information regarding these taxable fringe benefits is provided to us.
IRS information regarding taxable fringe benefits, including the Annual Lease Value tables, is available on the IRS website at Employers Tax Guide to Fringe Benefits.
Please reach out to your trusted Herbein advisor if you have questions regarding this article OR any year-end tax reporting questions.
With 2025 around the corner, Herbein is here to help you prepare with confidence. Our Year-End Tax Guide and hub of essential resources provide the tools you need to plan and grow your business in the new year. Visit our Year-End Resources Page today!
