Taxing and Reporting the Personal Use of Employer-Provided Vehicles Made Easy

Taxing and Reporting the Personal Use of Employer-Provided Vehicles Made Easy

Taxing and reporting the personal use of employer-provided vehicles can be complicated, but employers and employees both need to understand the rules. 

This guide will cover the most fundamental information about the personal use of employer-provided vehicles as they relate to taxing and reporting. 

An Introduction to Taxing and Reporting the Personal Use of Employer-Provided Vehicles

Personal use of a company vehicle refers to any non-business use of that particular vehicle.

The two most common examples of this include: 

• Commuting to and from work (home-to-office travel)
• Personal trips for non-work purposes (e.g., running errands or vacations)

These are each considered personal and taxable. 

Personal use of a company vehicle is treated as a taxable fringe benefit—essentially, additional compensation to the employee​. This means the employer must determine the value of personal use at least once a year,​ and report it as additional wages. 

Typically, the total personal-use value for the year is calculated and added to the employee’s taxable wages, with the appropriate taxes withheld.

Valuation Methods for Personal Use of an Employer-Provided Vehicle

When determining the value of personal use, the IRS has specific valuation methods to ensure consistency. 

One widely used method is the Annual Lease Value (ALV) method, which bases the calculation on the vehicle’s fair market value (FMV). 

In a nutshell, the ALV method works like this: you take the car’s FMV, use it to find an annual lease value from an IRS-provided table, and then multiply that lease value by the percentage of the vehicle’s personal use​. The product is the taxable value of the personal use.

Suppose a company car has an FMV corresponding to an annual lease value of $5,100, and the employee drives it 22% for personal trips. In this case, the personal use benefit would be $1,122 (22% of $5,100).

The ALV method is popular because it provides a fair, standardized value for the benefit. It approximates what it would cost to lease the vehicle privately. This way, the taxable amount aligns with the vehicle’s actual value. 

Just remember, this method taxes only the personal use portion of the car—any business use is excluded from the employee’s income as a nontaxable working condition benefit​.

Calculating Personal Use

Before you can put a dollar value on personal use, you need to know what portion of the vehicle’s usage was personal. This comes down to tracking mileage. 

Both the employer and employee should ensure business miles (for work-related travel) and personal miles are recorded, typically via a mileage log.

Once you know the totals, you can compute the personal use percentage. Simply divide the number of personal miles by the total miles driven. 

For instance, if an employee drove 20,000 miles in a year and 5,000 of those were personal (the rest business), then 25% of the use was personal. 

That means 25% of the car’s annual lease value (from the ALV method) will be taxable to the employee. The remaining 75% is for business use and is not taxable​.

Accurate records are critical. If the employee doesn’t substantiate the business miles, the IRS could presume all the miles were personal, making the entire value of the car’s use taxable​. 

Keeping detailed logs protects both the employer and employee by clearly separating business use (non-taxable) from personal use (taxable).

Company Car Tax Rules

Under IRS rules, personal use of a company vehicle is a taxable fringe benefit that must be added to the employee’s wages. In other words, the value of an employee’s personal miles in a company car is considered additional income to them. 

Employers are responsible for calculating this fringe benefit and handling the tax withholding and reporting. 

Specifically, the value of personal use must be included in the employee’s wage totals and is subject to federal income tax, Social Security/Medicare taxes, and federal unemployment tax (FUTA)​.

Critically, the fair market value of the personal use benefit is subject to tax withholding once it’s determined​. 

Employers can choose to calculate and withhold taxes on this benefit each payday, monthly, quarterly, or just once at year-end. 

But no matter which approach the employer takes, the IRS requires that by the end of the year, the full value of all personal use during that year has been treated as taxable wages and taxed accordingly​.

Reporting Personal Use

Employers must report the personal use fringe benefit on required tax forms so it’s properly documented to the IRS and the employee:

W-2 Reporting 

List the value of the personal use benefit in Box 1 (wages) of the employee’s W-2 and Boxes 3 and 5 (Social Security and Medicare wages)​.

Form 941 Reporting

Include the fringe benefit amount on your quarterly Form 941 in the wage totals for the quarter you treat it as paid. It should be part of Line 2 (total wages) and also included in Line 5a (Social Security wages) and Line 5c (Medicare wages)​.

If you add the benefit in December (year-end), report it in the fourth quarter 941.

Business Vehicle Exceptions

In some cases, the IRS allows simplified valuation methods instead of the full annual lease value:

• Commuting valuation rule: If the only personal use of the vehicle is commuting, each one-way commute can be valued at $1.50 for tax purposes​. This rule requires the employer to have a written policy stating that no other personal use is allowed (only commuting).
• Cents-per-mile rule: If a vehicle is driven a lot for business and is below a certain value threshold, the employer can typically value personal use at the standard mileage rate instead of using the lease value.

For reference, the IRS lists the standard mileage rates for 2025 as:

• Self-employed and business: 70 cents/mile 
• Charities: 14 cents/mile 
• Medical: 21 cents/mile 
• Moving (military only): 21 cents/mile 

There are certain requirements to qualify for the cents-per-mile rule. If an employer cannot meet the requirements for these exceptions, they must use the ALV method to value personal use as described above. Learn more about these requirements here.

Handling Taxes and Reporting 

Once you determine the value of an employee’s personal use of a vehicle, you must withhold and remit taxes on that amount. 

Employers can handle the federal income tax withholding on this fringe benefit in one of two ways​:

1. Add to wages method: Add the value of the personal use benefit to the employee’s regular wages and withhold income tax, Social Security, and Medicare on it​.
2. Supplemental withholding method: Withhold federal income tax on the fringe benefit at the flat supplemental wage rate (currently 22%) separately from the regular wages​.

Either way, the employer must deposit the payroll taxes related to this benefit. 

Note: An employer can choose not to withhold federal income tax on the personal-use benefit (this is allowed if you notify the employee in writing), but the employer must still withhold FICA taxes​.

Learn more about statutory vs. statutory non-employees here.

In that case, simply include the value of the benefit in the employee’s income (Box 1 of the W-2), and the employee will be responsible for paying the income tax on it when filing their return. 

Most employers still elect to withhold income tax during the year to make it easier for employees.

Keep Up with Changes

Laws and IRS guidelines regarding company vehicles can change over time. For example, the IRS lowered the maximum fair market value of a vehicle (including trucks and vans) from $62,000 to $61,200 for 2025.

Stay current by reviewing IRS updates (such as the annual Publication 15-B) each year. If any rules change or new guidance is issued, incorporate those changes to remain compliant (and consult a tax professional if needed).

Key Takeaways for Taxing and Reporting the Personal Use of Employer-Provided Vehicles

Remember that accurate record-keeping is the foundation of correctly taxing a company car. 

Employers and employees should track dates, miles, and purposes of trips. These records justify the split between business and personal use and can protect against potential IRS challenges​.

Make sure to include the value of personal vehicle use in the employee’s wages on their W-2 and withhold the appropriate taxes. The same value must be reported on your quarterly payroll tax return (Form 941) as part of total wages and is subject to FICA taxes​. 

Proper reporting fulfills your legal obligations and keeps everything transparent for the employee.

The guidelines covered in this article help employers confidently provide company vehicles to employees and handle the tax implications without trouble. 

Employees, in turn, will have peace of mind knowing there won’t be surprises at tax time since the personal use of the company car has been properly accounted for throughout the year.

To simplify fringe benefit compliance (like company car taxation), get a demo of Symmetry’s payroll tax solutions. See how Symmetry can help ensure accurate benefit tax calculations while saving you time.

Do you want to keep learning about tax compliance and similar topics?

Here are three more articles to read next: 

• How Subject Wages Differ from Taxable Wages—and Why It Matters
• Navigating 2025 Payroll Tax Changes: How Providers Can Prepare for Compliance
• Federal Tax Withholding: Wage Bracket Method v. Percentage Method