There are several different scenarios in which you might need to compensate an employee related to business use of a vehicle. The most common scenarios we see are these:
- Mileage reimbursements to employees related to business use of a personal vehicle,
- Scheduled auto allowances to employees meant to cover business use of their personal vehicle, and
- Company cars provided to employees.
The IRS has specific rules governing how employers must treat the compensation paid to employees related to auto use, and they basically come down to that documented business expenses are tax-free to the employee, but undocumented expenses must be taxed as normal compensation. We recommend you consult with your accountant(s) on any and all fringe benefits to get recommendations specific to your business.
Employees Using Personal Vehicles for Business
The most common way for an employer to provide an employee with tax-free compensation related to business use of a personal vehicle, the employee must turn in mileage records related to the business use and may be reimbursed at the current Standard Mileage Rate set by the federal government. (The rate is usually published in late December for the following calendar year.)
If an employer decides to give employees a flat allowance each month rather than bothering with the process of documenting and reimbursing exact mileage, the IRS has deemed that that allowance money is classified as regular compensation and is therefore fully taxable (just like regular hourly pay, commissions, and/or salary would be). That means the employer must pay their portion of FICA, Medicare, and unemployment taxes, and the employee must pay FICA, Medicare, and withholding taxes on the funds.
Note: In the case of allowance payments, the employee can keep records of their mileage and/or business-related expenses and make a claim when they file their taxes to get some of that tax money back.
Employees Using Business Vehicles for Personal Use
Flipping the scenario around, employees who are provided with company cars that they are allowed to use for their personal travel experience a tax impact as well. Typically, we see employers have those employees keep track of their personal mileage and turn in a report at the end of each year. The compensatory value of the personal use is calculated by multiplying the personal mileage times the current Standard Mileage Rate and reported through iSolved so that it can be taxed and reported properly as part of the employee's income.
For more information, consult your accountant and see IRS Publication 15-B.