May 23, 2013 | Payroll Software | Posted by Vicki Lambert, CPP
Unfortunately in Payroll, There is a Use for Algebra!
Fran Lebowitz once said, “In real life, I assure you, there is no such thing as algebra." Obviously she never worked in payroll and never had to calculate the taxable wages for the personal use of a company vehicle. Because whether it is for the personal use of a company car commuting home each night or an airplane to take a vacation, calculating the taxable income is nothing but algebra.
Because the personal use of a company car is subject to all taxes—FIT, FICA and FUTA on the federal level the IRS gives us four different accepted methods to determine this taxable income. Two of these methods are the General Valuation Method and the Annual Lease Value Method.
The first method does not use any algebra on the part of payroll. It calls the entire amount of the use of the vehicle as personal and forces the employee to deduct the business miles on their 1040 form. For example, an employee has a car valued at $18,000. The taxable wages are determined by using the IRS Annual Lease Value Table. On this table that vehicle is listed as $5,100 for the annual lease. Payroll adds the $5,100 to the employee’s gross wages and withholds all taxes... very simple, and no math for payroll. The employee has to deduct all the business miles -- not so simple with lots of math and very expensive.
The second method applies to any employee and any car, but the employee must submit a log showing the amount of miles driven and substantiated for business use. And it requires the most amount of algebra! Taking the same $18,000 vehicle, you determine the amount of personal miles by subtracting the substantiated business miles from the total miles driven.
The employee drove the $18,000 car 14,741 miles, 13,201 were for business use. The remaining amount, 1,540 were the personal use miles. Dividing the personal use miles by the total miles determines the percentage of personal use. In our example that would be 10.44%. Apply that percentage to the amount on the annual lease value table for a taxable income of $532.44 for the year.
Now you can see why algebra affects taxable wages -- if the log showing the substantiated business miles is not submitted, the taxable income is $5100. If submitted payroll must perform the calculations and the taxable income is $532.44. Guess which one payroll will end up doing?
But algebra isn’t just limited to company cars. If the employee uses a company aircraft for personal use such as a vacation that is also taxable income subject to all taxes. This is a multi-step type of calculation. The first step is multiplying the different Standard Industry Fare Level Formula (or SIFL) to different mileage amounts depending on the length of the trip. For example, the first 500 miles is charge at $.2655 per mile, but 501 to 1500 miles is charged at a SIFL rate of $.2024. That calculation is then multiplied by the percentage assigned to the aircraft by weight and type of employee. And finally the current terminal charge is added. To add to the complicated calculations, the rates are changed every six month.
So when it comes to company vehicles, the use of algebra in the “real world” of payroll is alive and well.
Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website www.thepayrolladvisor.com offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.