Agreement Car Allowance Withholding
Description
How to fill out Employment Agreement - Executive With Car Allowance?
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FAQ
A car allowance is a set amount that you give to your employees to cover a period of time. This car allowance is intended to cover typical costs of owning a vehicle, such as maintenance, wear-and-tear, insurance, fuel and depreciation.
Because a standard car allowance is a non-accountable plan, it should be taxed fully as W-2 income. The employer should withhold federal income taxes, FICA/Medicare taxes, and (if applicable) state income taxes on the full allowance amount. The car allowance should be taxed at the employee's income bracket.
The IRS sees car allowances as a form of compensation rather than a reimbursement for travel. Therefore, any money you paid to your employees as a car allowance is taxable just like wages.
If the allowance is more than the federal rate, the employer must include the allowance amount up to the federal rate under code L in box 12 of Form W-2. This amount is not taxable. However, the excess allowance is included in box 1 of Form W-2 and is treated as wage income.
A car allowance is taxable unless you substantiate business use of the payment. You can avoid taxation if you track business mileage and demonstrate that the allowance never exceeds the equivalent of the IRS business mileage rate ($. 585 per mile for 2022). This is called a mileage allowance, or mileage substantiation.