IRS Calculation for Fringe Benefit Valuation Rules
The list of fringe benefits the IRS will allow you to exclude their value from employee compensation is a long one. However, there are many cases where a fringe benefit you provide to an employee is required to be valued and considered as employee compensation for federal income taxation and withholding. There are General and Special valuation rules.
General Valuation Rule
For most fringe benefits the employer must use the general valuation rule to determine value to add to employee compensation. The general valuation is the FMV, Fair Market Value of the benefit.
Fair Market Value – The fair market value of a fringe benefit is the amount of money the employee would have to pay a third party in an arms-length transaction. This amount would be to either buy or lease the benefit. This cannot be an amount decided upon by either the employer or the employee alone but must consider all the facts and circumstances.
Valuation for Vehicle Use by Employees
The best and most common use of the FMV rule is with vehicles provided for employee use. Generally, the FMV of a vehicle provided for employee use is the amount the employee would pay to lease the same of similar vehicle in the same geographical area with the same or comparable lease terms. Often, a one-year lease term is used. Unless the employee can prove that the vehicle could have been leased on a cost-per-mile basis, this basis cannot be used for the valuation.
If using the cents-per-mile rule to value the benefit for the employee, you multiply the number of miles the employee uses the vehicle for personal use by the IRS standard mileage rate. Personal use is for any mileage driven not for business purposes. The rate for 2022 is 58.5 cents per mile. You would multiply that rate times the personal miles driven by the employee. You can use the cents-per-mile rate if either:
- You expect the vehicle to be used regularly in your trade or business.
- The vehicle meets the mileage test.
The vehicle can be considered as regularly used in your trade or business if either:
- At least 50% of the vehicle’s total mileage annually is used for business purposes.
- The employer sponsors a commuting pool that uses the vehicle each workday to drive at least three employees to and from work.
The vehicle must have been driven at least 10,000 miles for business during the year and have been used primarily by employees. The value computed must be included in employee wages for withholding purposes.
The value to be added to employee compensation under the commuting rule is calculated by multiplying each one-way commute from home to work or work to home by $1.50. The amount must be included in the employee’s wages or reimbursed by the employee.
Lease Value Rule
Under the lease value rule, the value of employee use is determined by its annual lease value. For a vehicle used only part of the year, the annual lease value is probated.
There are other rules and, in some cases, complicated charts for valuation. These abbreviated explanations should give you the information you need to discuss benefits valuation with your tax professional or accountant.