A vehicle reimbursement program can be a great way to reduce transportation costs while adding another perk to help attract employees. However, you may need to consider the tax implications of such a plan for both the employer and the employee. What should you know about taxable vehicle benefits before instituting any type of reimbursement plan?
Funds Used for Reimbursement Purposes Are Considered Taxable Income
When an employee is reimbursed for the miles that he or she drove to a conference, to the airport to pick up an investor or for any other reason, it must be included as income. This means that the employee is responsible for paying income as well as applicable employment taxes on that money. It is important to note that employers must also withhold employment and income tax owed on wages given to employees..
Employees May Claim the Reimbursement as a Business Expense
Those who itemize deduction on a tax return may be entitled to claim the use of their car as a business expense. This may reduce or eliminate the income tax owed to the government. However, employment taxes may still apply as they tend to be based on gross wages as opposed to your adjusted income after credits and deductions. For employers, any wages paid to employees are generally considered a business expense that reduces their overall tax burden.
What Happens If You Don’t Have Employees?
What would the tax implications be for a company that used independent contractors instead of employees? For the worker, he or she would be entitled to deduct expenses related to mileage, the business use of a car and other reasonable expenses such as food or tolls while driving to a destination. Those who hire contractors may be allowed to deduct any money provided to that person for travel or any other expenses as part of an overall compensation package.
Employers May Claim Depreciation for the Vehicle
If the employer owns the car that was used by a worker to travel to or from a business event, the company may claim depreciation of the vehicle for tax purposes. It may also claim any lease payments made on the vehicle as long as it was primarily used for business travel or other related reasons.
A vehicle reimbursement program has many benefits for employers and workers alike. Prior to starting such a program, talk to your accounting department or to a tax professional who may be able to explain in more detail the tax implications of doing so. This ensures that neither the company nor its employees or contractors have any surprises when they file their next tax returns. Visit CarDATA if you would like to learn more.