The IRS is offering guidance to employers who give cash incentives for employees to buy hybrid cars.

The IRS says that the cash incentives are taxable compensation and employers should include the cash incentive amounts in employees' compensation reported on year-end Form W-2 earnings statements.

The cash incentives also are subject to income tax withholding and employment tax, the IRS says. The tax code provides for an exclusion from income for employee discounts only if the employer produces the product and certain other requirements are met, the IRS says.

A number of large employers have launched programs offering employees incentives to purchase hybrid cars. Last month, Bank of America Corp. launched a pilot program that offers employees a reimbursement of $3,000 if they purchase a new hybrid vehicle. The pilot program covers more than 21,000 associates living within 90 miles of Boston, Charlotte, and Los Angeles.

The IRS notes that the tax code already includes incentives for the purchase of hybrid cars. The Alternative Motor Vehicle Credit for hybrid vehicles applies to vehicles purchased on or after January 1, 2006, and it may be as much as $3,400 for those who purchase the most fuel-efficient vehicles.