When an employer provides a vehicle to an employee, any personal use of that vehicle is considered a taxable fringe benefit by the Internal Revenue Service (IRS). The IRS requires employers to report this value on the employee’s Form W-2 and maintain proper records on their tax return.
To comply, companies must keep written records that clearly distinguish between business and personal use. Employees are responsible for maintaining these records — typically through a mileage log, tracking app, or OBD-II device — to document how each company vehicle is used throughout the year.
What Counts as Personal Use of a Company Car?
The IRS defines personal use as any driving not directly related to business. Even minimal non-business driving must be recorded. Examples include:
- Commuting to and from your regular workplace
- Running personal errands such as shopping or appointments
- Driving on weekends or while off-duty
- Family or household members using the vehicle
Unless specifically exempted, commuting is treated as personal use under IRS regulations (Publication 15-B, Employer’s Tax Guide to Fringe Benefits).
IRS Recordkeeping Requirements
To determine the taxable portion of vehicle use, employees and employers must maintain contemporaneous written documentation as required by IRS Topic No. 510 — Business Use of Car.
Each record should include:
- Date of the trip
- Purpose of the trip (business or personal)
- Starting point and destination
- Odometer readings or total miles driven
- Business vs. personal mileage totals
Without adequate records, the IRS may classify the entire vehicle use as personal, making the full value taxable to the employee.
How Personal Use Is Taxed
Personal use of a company vehicle must be included in the employee’s gross income and is subject to federal income tax, Social Security, and Medicare withholding. The employer must report this value on the employee’s Form W-2 and pay associated employment taxes.
The IRS permits several valuation methods for determining how much of the company car’s value is taxable:
1. Cents-Per-Mile Method
Under the Cents-Per-Mile rule, the employer multiplies the number of personal miles driven by the IRS-set standard mileage rate. This method is typically used when a vehicle is driven frequently for both personal and business purposes.
2. Annual Lease Value (ALV) Method
This approach uses the vehicle’s fair market value (FMV) to determine an annual lease value. The employer multiplies this figure by the percentage of personal miles driven. The ALV method is common for higher-value vehicles.
3. Commuting Rule
If personal use is strictly limited to commuting between home and work, employers may apply the Commuting Rule, valuing each one-way commute at a fixed rate — currently $1.50 per trip.
Separate Records for Each Vehicle
If you were provided more than one company car during the year, the IRS requires you to maintain a separate statement for each vehicle. Each statement should detail the mileage and usage records for that specific vehicle, ensuring accurate tax treatment.
Why Accurate Tracking Matters
Failing to properly record mileage can result in:
- The entire vehicle value being treated as taxable income
- IRS penalties for underreporting wages or failing to withhold taxes
- Inaccurate W-2s, which can delay tax filings or trigger audits
- Lost business deductions for the employer
Accurate recordkeeping ensures compliance and prevents costly reclassification of all vehicle use as personal.
Best Practices for Employees & Employers
- Establish a written vehicle policy outlining business vs. personal use.
- Require real-time mileage tracking using approved apps or devices.
- Review logs monthly or quarterly to ensure compliance.
- At year-end, calculate the taxable value of personal use based on the chosen IRS method.
- Include the value on the employee’s Form W-2 before year-end processing.
For detailed guidance, refer directly to the IRS Publication 15-B and Topic No. 510.
The personal use of a company car is not just a small perk — it’s a taxable fringe benefit governed by clear IRS rules.
By maintaining accurate records, following approved valuation methods, and consulting trusted resources (like IRS.gov), both employers and employees can remain compliant and avoid unnecessary penalties. Contact us with additional questions on company vehicle rules.
