2023 Taxable Fringe Benefits Reporting Reminder

December 11, 2023

As we approach year-end, now is the time to gather information needed to properly report certain taxable fringe benefits provided to employees during 2023. It is important to start preparing for year-end tax reporting at this time to complete the reporting prior to year-end to be included on the annual federal Form W-2.

The two most common fringe benefits are the personal use of company vehicles and employer provided group term life insurance.

Below is a summary and explanation of these taxable fringe benefits and how to report them on Form W-2.

Taxable fringe benefit for the value of personal use of company-owned vehicles

The value of an employee’s use of a company-owned vehicle is a taxable fringe benefit reportable on federal Form W-2, and taxable for federal income tax purposes but currently not taxable for Pennsylvania state or PA local income tax purposes.

There are several methods to calculate the “value” of an employee’s personal use of a company-owned vehicle as follows:

Annual Lease Value Method (most common)

The first step to using the Annual Lease Value method is to determine the FMV of the automobile on the first date it is available to any employee for personal use. The value is determined using Annual Lease Value Tables published annually by the IRS. The final step is to multiply the Annual Lease Value amount by the percentage of personal miles over total miles driven by the employee for the year.

Fair Market Value (FMV) for Purchased Vehicles

The Fair Market Value (FMV) is the amount a person would pay to purchase the automobile from a third party in an arms-length transaction and includes all purchase expenses such as sales tax, and title fees.

Fair Market Value (FMV) for Leased Vehicles – Safe-Harbor Rules

Safe-harbor rules allow FMV to be your cost of purchase including sales tax, title fees, and other purchase expenses. For leased vehicles, the safe-harbor FMV can be either 1) the manufacturer’s invoice price plus 4% 2) the manufacturer’s suggested retail price minus 8%, or 3) the retail value of the automobile reported by nationally recognized pricing source if that retail value is reasonable.

Additional Expenses and Excluded Items

The annual lease value does not include the value of fuel you provide to an employee for personal use, regardless of whether you provide it, reimburse its cost, or have it charged to you. You must include the value of the fuel separately in the employee's wages. You can value fuel you provided at FMV or at 5.5 cents per mile for all miles driven by the employee.

If you provide any service other than maintenance and insurance for an automobile, you must add the FMV of that service to the annual lease value of the automobile to figure the value of the benefit.

4-Year Lease Term

The annual lease values in the table are based on a 4-year lease term. These values will generally stay the same for the period that begins with the first date you use this rule for the automobile and ends on December 31 of the fourth full calendar year following that date.

The annual lease value for each later 4-year period is determined by the FMV of the automobile on January 1 of the first year of the later 4-year period. If the special two-month accounting rule described below is used, figure the annual lease value for each later 4-year period at the beginning of the special accounting period that starts immediately before the January 1 date of the first year of the of the later 4-year period.

Commuting Rule

Using the Commuting Rule, the value of a vehicle provided to an employee for commuting use is calculated by multiplying each one-way commute by $1.50. This amount is included in the employee’s wages or reimbursed by the employee.

This method is only available if all the following requirements are met:

You provide the vehicle to an employee for use in your trade or business and, for bona fide non compensatory business reasons, you require the employee to commute in the vehicle.
You establish a written policy under which you don't allow the employee, nor any individual whose use would be taxable to the employee, to use the vehicle for personal purposes other than for commuting or de minimis personal use.
The employee doesn't use the vehicle for personal purposes other than commuting and de minimis personal use.
If this vehicle is an automobile (any four-wheeled vehicle, such as a car, pickup truck, or van), the employee who uses it for commuting isn't a control employee.

A control employee is defined as:

A board or shareholder-appointed, confirmed, or elected officer whose pay is $130,000 or more.
A director.
An employee whose pay is $265,000 or more.
An employee who owns a 1% or more equity, capital, or profits interest in your business.

Cents-Per-Mile Method

Using this method, the value of a vehicle you provide to an employee for personal use is determined by multiplying the total miles the employee drives the vehicle for personal purposes by the applicable 2023 standard mileage rate. For 2023, the standard mileage rate is 65.5 cents per mile.

This method can only be used if either of these requirements is met:

You reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year (or for a shorter period during which you own or lease it).
The vehicle is driven at least 10,000 miles during the year and the vehicle is primarily used by employees.

This method cannot be used if the value exceeds $60,800 (for 2023), when first made available to any employee for personal use. See IRS tables for previous threshold limits.

Special Accounting Rule for Calculating the Value of All Non-Cash Fringe Benefits: Two-Month Accounting Rule

Under a special rule, benefits provided in November and December, or a shorter period in the last two months of the year, may be treated as paid in the following year. You may only treat the value of benefits provided during the last two months as paid in the subsequent year. You do not have to notify the IRS that you are using this special accounting rule.

An employer may use this rule for some fringe benefits and not others. The special accounting period does not need to be the same for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, it must use the rule for all employees who receive that benefit.

Additional Compliance Documents for Employee Use of Company-Owned Vehicles

In addition to the information included in this letter, we suggest you consider the following additional compliance documents with respect to the employee use of company-owned vehicles. Contact us to obtain any of these documents, which are also available in 2023 Year End Information under Resources in the Insights section of our website:

Employer Notification of Elections Concerning the Personal Use of Employer-Provided Automobiles (Employer Statement) – Employee acknowledgment of the taxable fringe benefit from the employee’s personal use of a company-provided vehicle
Vehicle Information Summary – Non-Cash Fringe Benefit Computation – Form for employees to provide information necessary to calculate the value of personal use of a company-provided vehicle
Written Policy Statement – Prohibiting Personal Use of Vehicles – Employee consent to company policy prohibiting personal use of company-owned vehicle
Written Policy Statement – Prohibiting Personal Use of Vehicles Other than Commuting - Employee consent to company policy prohibiting personal use of company-owned vehicles other than for commuting

Group Term Life Insurance Fringe Benefit

Another common employee fringe benefit is Group Term Life Insurance.

Under current tax law, an employer can provide up to $50,000 of group-term life insurance coverage to an employee tax-free. Premiums for amounts of group-term life insurance provided to employees beyond $50,000 of coverage are taxable to the employee as wages and are subject to Social Security and Medicare taxes and you may, at your option, withhold federal income tax.

However, the taxable group term life premiums are generally not subject to FUTA taxes if paid under an employer plan. Also, the premiums are generally not taxable for Pennsylvania or Pennsylvania local income tax purposes. If you are using a payroll service these amounts must be reported and the appropriate taxes withheld by the last pay period of 2023.

If you are not using a payroll service and would like us to calculate the amounts that need to be included in your payroll, please provide our office with the following information before you run your last payroll for 2023:

Employee Name: ______________________________
Amount of Coverage: __________________________
Premiums Paid for 2023: ________________________

Important Note if Herbein + Company, Inc. Prepares Forms W-2 for Your Business

Please note Forms W-2 prepared by Herbein + Company, Inc. cannot be processed until necessary information regarding these taxable fringe benefits is provided to us.

IRS information regarding taxable fringe benefits, including the Annual Lease Value tables, is available on the IRS website at Employers Tax Guide To Fringe Benefits.

Please reach out to your trusted Herbein advisor if you have questions regarding this article OR any year-end tax reporting questions.

Article contributed by Michelle Sowers