Payroll in Practice: 1.16.2024

Question: An employer provides company cars to certain employees, and the employees report total mileage and business mileage on a quarterly basis. During the month following the end of the quarter, the employer determines the amount to include in employee wages for personal use. Then, on the following payday, the employer reports the wages and withholds taxes. This means the fourth-quarter benefit is reported in January of the following year. Is this allowable?

Answer: Generally, the value of a noncash fringe benefit is includible in employee wages in the year the benefit was provided. However, special rules may help employers deal with noncash fringe benefit valuation and tax compliance at year end.

The value of personal use of an employer-provided vehicle, if more than de minimis, is a taxable fringe benefit. Commuting use of an employer-provided vehicle more than one day a month is specifically mentioned as not being de minimis in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. The value of use for business purposes is generally excludible from wages as a working condition fringe benefit.

In general, the value of a noncash fringe benefit must be determined by Jan. 31 of the following year. Prior to that date, the employer may reasonably estimate the value of the benefit for withholding and tax deposit purposes.

The employer may also choose the date or dates when the benefit is deemed paid for most noncash fringe benefits including employer-provided highway motor vehicles. Benefits may be treated as paid on any frequency – such as per pay period, quarterly, or semiannually – but no less frequently than annually. An employer may use different pay periods for different employees and may change the pay period as long as all benefits provided in a calendar year are treated as paid no later than Dec. 31 of that year.

Applicable income, Social Security, and Medicare taxes must be withheld on the date or dates the benefits are treated as paid, and the taxes must be deposited according to the employer’s deposit schedule. If the deemed deposit date does not coincide with a cash payment from which to withhold, the employer should deposit the taxes on time and recover the taxes from the employee later. If the employer does not recover the employee-owed taxes, the amount is treated as additional income to the employee and is subject to withholding.

Estimating the amount of tax to collect and remit carries the risk of underpayment or overpayment. The employer may be subject to an underpayment penalty if it deposits less than the amount required to be withheld. If the employer overpays the taxes, it may apply for a credit or refund.

Similarly, an employer that accurately reported an employee’s tax obligation on Form W-2, Wage and Tax Statement, but withheld less than that amount from the employee’s pay may recover the difference from the employee. However, the income tax must be recovered before April 1 of the following year.

Under a special accounting rule, which might be helpful for smoothing year-end processing, an employer may treat the value of taxable noncash benefits provided during the last two months of the year as paid in the following year. This does not mean that all benefits paid during the last two months can be deferred. Only the value of benefits provided during those months can be treated as paid in the next calendar year.

For example, an employer decides to determine the value of personal use of employer-provided vehicles on a quarterly basis but sets the reporting quarters as ending Jan. 31, April 30, July 31, and Oct. 31. The final mileage report of the year is due from the employees on Nov. 15. The employer reviews the reports and calculates the value of personal use of the vehicles in time to include the wages and withhold the taxes on the regular Dec. 15 payday.

The value of the November and December personal use is included in wages for the following year. The personal use of the vehicles during November and December is deemed paid as wages to the employees during the following year along with the benefits provided during January through October of that year.

Use of the special rule is optional and does not have to be used for all benefits. However, if it is used for a particular benefit, it must be used for all employees who receive the benefit. The employer may elect a shorter period such as the last month or pay period of the year. The employee must account for the benefit using the same period that the employer uses. The employee cannot use the special rule for a benefit unless the employer does.

An employer is not required to notify the IRS when it elects to use the special rule. The employer may also, for appropriate administrative purposes, change the period without notifying the IRS. However, the employer must report the income and deposit the taxes as required for the changed period.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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