Idea in short
- Company cars often come with tax implications due to monetary advantages that one should be aware of.
- There are two methods to deal with the tax implications based on usage.
- The choice of how the monetary benefit is calculated can be redefined each year.
Some employers provides an option for a company car, which you are allowed to use for private purposes. Unfortunately, this lucrative scenario has many catches in practice. The tax office looks closely when it comes to such perks and benefits. When faced with the choice between a company car and more salary, you should know the exact tax implications. Only then should you decide whether to opt for a company car or more salary?
Monetary advantage subject to payroll tax and social security
Company cars are considered a popular means of employee motivation. The company bears the costs and the employee sometimes gets a car that he, otherwise, might not be able to afford himself. Some employers also offer the model to forego a salary increase or part of the salary, and to finance the car through a salary conversion. The tax office considers a company car – whether classic or funded by salary conversion – a monetary advantage. This is an in kind benefit that an employee receives from the employer. A monetary advantage is always subject to income tax and social security. Anyone who has a company car and is allowed to use it privately must, therefore, include it in his / her tax calculation. Company cars that are not suitable for private use – for example, vans that are exclusively intended for the transport of goods – do not have to be taxed.
One-percent lump sum on the list price
Company car drivers can choose between two options as to how the monetary advantage is calculated. The first option is the so-called one-percent flat rate. The monetary benefit will be set at 1% of the list price of the car at the time of its initial registration. The price the employer actually paid for the car does not matter. For example, if the list price is € 30,000, the monetary advantage is € 300 per month. This amount will then be added to the monthly salary. This total amount is the basis for calculating the payroll tax. This means, after the salary conversion, the wage increases almost again. In addition to this 1% lump sum, 0.03% of the list price for each kilometer of the distance is set and taxed monthly for journeys between the home and the first place of work. If the employee participates in the cost of a company car for private use, these additional payments to the employer can reduce the value of the monetary advantage – in extreme cases, theoretically, to zero.
In the logbook method, you should record each trip in a logbook. For business trips, employees record:
- The date
- The mileage at the beginning
- The mileage end of the journey
- The destination
- Detours and the itinerary, if any, and
- The purpose of the trip
For example, this could be a customer visit. For private trips, recoding the travelled distance is sufficient. A short note in the logbook is sufficient for trips between the apartment and the first place of work. From the total distance traveled, the proportion of private trips is determined. The employee would then have to pay tax for this value of private use.
When and how is the salary conversion worthwhile?
As a rule, which calculation basis is the correct depends on the share of private use. In salary conversion for a company car, the rule among tax experts is that the less the company car costs and the shorter the journey to work, the lower the taxation of the monetary advantage. Specifically, this means that the flat-rate taxation according to the 1% rule would pay for those who use their company car for private rides at least 30% of the time. Maintaining a logbook, especially for users who use their company car for private trips, entails a significant overhead and privacy concerns. However, it must always be verified on a case-by-case basis whether a partial deduction really pays off.
Incidentally, you can re-define how the monetary benefit should be calculated each year. Within a year, this is only possible when you change your vehicle. The tax authorities want to prevent taxpayers from using the 1% method during months of high private use and the others using logbook.
- When faced with the choice between a company car and more salary, you should know the exact tax implications.
- The proportion of trips made for business and private purposes determine the best method to handle the incurred monetary advantages.
- The calculation basis can be revised each year or within a year, if you change your vehicle.