and Variable Rate Automobile Allowances
lieu of submitting extensive records documenting actual expenses, IRS rules
provide two methods for reimbursing employees for business use of their
personally owned automobiles with significantly reduced record keeping
Reimbursements made on the basis of either a fixed mileage allowance or a fixed
and variable rate (FAVR) allowance, require substantiation only of the business
purpose, time, and place of the vehicle use. The amount of expenses incurred is
deemed substantiated, provided the allowances meet certain limitations and
The value of an employees' personal use of a company car is includable in the
worker's gross income unless it can be excluded as a de minimis benefit or a
qualified non-personal use vehicle. Employers may decide whether or not to
withhold income tax on value of employee's personal use of a company car.
Employers electing not to withhold must notify the affected employee of that
decision and include fair market value of the benefit on the employee's Form
W-2. Employers must withhold Social Security taxes and pay FICA and FUTA taxes
on the value of personal use. Those employers electing to withhold income and
employment taxes may treat the value of the personal use of a company car as
paid on a pay period (on a quarterly, semi-annual, or annual basis). The general
withholding methods and deposit rules for taxable fringe benefits apply.
An employer can determine the value of a worker's personal use of a company car
by using one of several valuation rules established by the IRS. For example,
under the general valuation rule, the personal use value of a vehicle is the
fair market value of its availability - that is, the amount a worker would pay
to lease the car. Several optional valuation rules also are set forth in IRS
regulations. These include:
Annual Lease Valuation Rule - An automobile made available to employees
for an entire calendar year may be valued according to the IRS's annual lease
value table, which provides lease values based on a car's fair market value.
Employers can use several methods to determine a car's fair market value.
Cents per Mile Rule - Under this option, employees' personal use may be
valued by multiplying the number of personal miles driven by the standard
Commuting Valuation Rule - Where the employer prohibits personal use of a
company car except for commuting, the value that constitutes taxable wages is
$1.50 per one-way commute, per employee.