In our mobile society, employees may get around by car, truck, or van on company business. They may use their own vehicle or one that's company-owned. Driving on company business can raise liability issues as well as tax concerns.
You have no exposure for employee accidents that occur in personally-owned vehicles during the commute to and from work. However, if employees are driving company-owned vehicles during their commute, or if they use their personal or company vehicles for business driving, make sure you have adequate insurance coverage.
Also use background checks to determine whether all employees who will be driving for business purposes have a valid license and, if necessary, the proper license classification for the vehicle they will be driving.
If you cover the cost of business driving, how you handle it affects employee compensation and employment taxes. Here are some scenarios:
- Reimbursement of employee expenses of his/her own vehicle -- accountable plan. If you use an accountable plan (e.g., you reimburse at the IRS mileage rate, which is 56 cents per mile in 2014, and requires substantiation), then the reimbursement is not income to the employee (it is not reported on the W-2); it is not subject to employment taxes. The business can deduct the full amount of the reimbursement.
- Reimbursement of employee expenses of his/her own vehicle -- nonaccountable plan. The reimbursements are additional compensation to the employee; the employee is taxed on the reimbursement, and the company pays employment taxes on it. The employee can deduct his/her expenses on Schedule A if personal expenses are itemized. Such expenses are deductible to the extent they exceed 2% of adjusted gross income. Employees who are "high-income taxpayers" are subject to a phase-out of itemized deductions and can lose some of these allowable deductions.
- Employee drives a company vehicle on business only. The company deducts vehicle expenses; there is no income over and above normal compensation to the employee in this case.
- Employee drives a company-owned vehicle for business and personal purposes. Personal use of the vehicle is taxable to the employee. The company can opt to report the value of vehicle usage on the employee's W-2 using the annual lease value of the car, which can be found in IRS Publication 15-B. Then the employee can deduct the portion of business driving on Schedule A as explained earlier. Or the company can value the personal use and report only this amount on the employee's W-2. There are a variety of IRS-created ways to value this personal use, which can also be found in which can be found in IRS Publication 15-B.
- Employees drives a company-owned vehicle that's considered a "nonpersonal use vehicle." Personal driving of such vehicle is treated as a nontaxable fringe benefit. A nonpersonal use vehicle includes delivery trucks with seating for the driver only, or the driver plus a folding jump seat; hearses; special-purpose farm vehicles; certain pickup trucks and vans weighing under 14,000 pounds with permanent decals or advertising; and certain construction equipment.
Be sure to communicate information about employee driving with your insurance agent and tax advisor.