A fleet manager is tasked with various responsibilities. Among them is making sure that the company and its employees are compliant with IRS rules and regulations.
Now companies have various ways of charging for personal use, which we shall talk about later. But, what's essential to remember is that no matter the method, they all involve some calculations to ensure that they charge the appropriate amount for personal use.
Today, we learn about these calculations and methods of collecting personal use.
What Is Personal Use?
Fleet managers need to understand what personal use is first before they can start tracking and valuing it. Some examples of personal use include using the vehicle to conduct unrelated business, like on weekends, evenings, vacations. Use by a non-employee like a family member is also considered personal use.
Defining personal use is mostly a matter of common sense. It simply means instances when the vehicle was used for personal and not business purposes. For instance, driving from home to work is personal use, requiring the driver to pay a personal use fee. But if the employee has a home office that is a business place, this won't be considered commuting as they will be at work when at home.
How to Establish Value
You can establish value using several ways, as per the IRS outlines;
- Annual lease value (ALV)
The IRS provides an ALV table to guide fleet managers. However, this method is best for four-wheeled vehicles. You have to refer to the IRS ALV table to determine the ALV. And find out the fair market value of when the vehicle was first given to the employee. Then you multiply by a percentage fraction of what miles were driven for personal use from the total driven miles.
- Cent per mile
You need to multiply the miles that were driven in comparison to the income offered by the company. However, this method has some limits and conditions that you should consider.
- Added Costs
If a company pays for the fuel used for driving personal miles, it has to be calculated when establishing value. And this stands at 5.5% cents/mile, according to IRS guidelines.
What Are the Personal Use Method Collections?
There are only three methods that companies can use to charge for personal use. These are;
Full Value Method
Here, companies report the full value of a worker's W2. Therefore, the driver will have to calculate what mileage they used for business and subtract the benefit's value from their individual tax return.
For instance, the IRS states that $6850 is the value of the benefit of a vehicle worth $25000. So, the company will add $6850 to an employee's W2. Then the worker would need to find out how many miles they used for business purposes and those for personal use. For example, it could be 70% miles for business and 30% for personal use.
In that case, they would deduct $4795 ($6850 x 70%) from $6850 on their taxable income.
Mileage Log Method
This requires drivers to submit their mileage logs for personal and business use constantly. Then, use one of the methods we've discussed above to charge W2 for personal usage. Mileage records can be after every month, four months, six months, or yearly.
Let's use the same example above. The company takes $6850 multiplied by 30% for personal use and adds this amount to a worker's W2.
Personal Use Reconciliation Method
This deducts income rather than adding to it. The company sets a fixed amount to be deducted from a driver's income regularly for personal use. Then, when the year ends, the exact amount used for personal use is calculated and differences, if any, reconciled.
Using the same example. Assuming a company charges $6850 and 30%, which is $2055. Now, if a company is charging $100/month for personal use, the employee owes $2055 in taxes, but they've already paid 1200 ($100x 12) towards their taxes, meaning that the company owes ($2055-$1200) to the employee.
No matter the collection method used, ensure that the employee understands its terms to avoid confusion during tax payment.
If you still have more questions regarding fleet management for personal use, Wilmar is here to help. Our company offers customized fleet solutions to ensure that your business operates smoothly. Contact us today for more information.