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If you are self-employed, you deduct your vehicle expenses on Schedule C or C-EZ of IRS Form 1040. Part IV of Schedule C or Part III of Schedule C-EZ may be completed if you are claiming the standard mileage rate and you are not required to file IRS Form 4562, Depreciation and Amortization, for any other reason. Otherwise, Part V of Form 4562 must be completed, and the appropriate amount must then be transferred to Schedule C.
An employee who wants to deduct employee business expenses, including unreimbursed vehicle expenses, must generally file IRS Form 2106, Employee Business Expenses. However, some employees may be able to file IRS Form 2106-EZ, Unreimbursed Employee Business Expenses. To be able to use Form 2106-EZ, the employee must have used the standard mileage rate for the tax year in which the vehicle was placed in service as well as the tax year for which the return is filed. In addition, the employee must not have received any reimbursement for any business expenses from an employer. Amounts paid by an employer under a nonaccountable plan are not classified as reimbursements.
Whenever you provide a company vehicle for an employee's personal use, you are generally required to do all of the following:
- Report the value of the employee's use of the car as income on his or her Form W-2 (either aggregated with other income or reported on a separate W-2).
- Withhold income tax on the value of the fringe benefit using a flat 27 percent rate, or add the value to the employee's regular wages for a payroll period and withhold income tax on the total.
- Withhold and pay employment tax (FICA and FUTA), where applicable, on the value of the fringe benefit.
However, you may elect not to withhold income tax on the value of non-business use of a vehicle you provide, if you notify the employee of this fact and include the value of the personal use of the vehicle on the employee's W-2. Even if you do that, you are still required to withhold and pay FICA and FUTA tax.
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