Vehicle allowances, or car allowances, have been popular among companies in need of a quick and easy vehicle program. But plenty of companies are coming to terms with the fact that they are far from the best option. The biggest issue to most employers is the tax waste. But what are the biggest disadvantages to employees? Let’s dive into the negatives of the employee vehicle allowance.
Tax waste is a two-way street. Employers may pay more, but employees definitely receive less. On the average car allowance of 2021, $575, employees only receive $393. That’s a loss of $182 to taxes, and an entirely needless one. Employee vehicle allowances can be improved by making them accountable allowances, but that doesn’t solve other issues inherent with the program.
Each month, mobile workers receive a stipend to cover the costs of driving their personal vehicle for business reasons. This makes an employee vehicle allowance great for employers. It’s a dependable payment with no variation. And everyone receiving the same amount is fair, right? Perhaps if everyone drove the same amount, it would be. However, employees don’t all drive the same distance. Some assignments come with more territory to travel than others, which means more money being spent on fuel.
The flat rate of an employee vehicle allowance doesn’t account for the geographic differences in the cost of owning and operating a vehicle. Employees in areas with high gas prices will spend their stipend far quicker than employees in areas with lower gas prices. When employees spend their monthly allowance before the month’s end, they begin paying for fuel out of pocket. This incentivizes mobile workers to drive less, and understandably so. If the vehicle program doesn’t adequately cover the costs of business driving, it isn’t working.
There are several vehicle programs that companies use. Many of them have the same issues as a car allowance: the reimbursements are not geographically specific, some mobile workers are over reimbursed, others aren’t reimbursed enough. There’s really only one solution, and that is the Fixed and Variable Rate (FAVR) Reimbursement program.
The FAVR program compensates employees for the fixed costs—taxes, depreciation, license and registration fees—and variable costs—gas, oil, tires, maintenance—of owning and operating a vehicle. What’s more, the right platform can calculate the reimbursement specific to each driver. That means employees receive fair and accurate reimbursements for the business mileage they put on their personal vehicle.
Employers should reimburse employees appropriately for the business mileage they put on their own vehicles. In most cases, an employee vehicle allowance simply isn’t doing that. Other vehicle programs similarly fall short. In many states, under-reimbursing employees is a violation of labor law. Companies should look to implement the Fixed and Variable Rate Reimbursement program to enable their mobile workforces to perform at their best.
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