What makes a car allowance taxable income?
Across industries, car allowances have long been a favorite vehicle program. The reasoning is as simple as the program itself: a car allowance is easy to implement and upkeep. Which, for a company with hundreds of mobile employees, or just a handful, may seem like the way to go. For all the mobile workers, companies share a lump sum each month to cover the costs of business driving in their personal vehicles. The problem? Well, there are a few.
Car Allowances are Taxable
We can skip over the fact that car allowance programs do not fairly distribute money to its mobile workforce. We can forgo the fact that it disincentivizes mobile workers to do their job. But we cannot ignore its biggest problem: the car allowance is taxable. Which means that, in the end, it pays mobile workers less and costs the company more.
When compared with other vehicle programs, why is a car allowance taxable?
One big reason that employers have car allowance programs? They’re easy. The company sets the amount and pays it. The drawback to this approach is that it does not meet the IRS requirements for substantiation. When companies don’t meet those requirements, the IRS views car allowances as income. That means both employers and employees pay taxes on the allowance.
Companies with car allowance programs aren’t the only ones to face this dilemma. Businesses that use a mileage reimbursement program, also known as a cents-per-mile program, without proper substantiation are also taxed. They also face taxation when they reimburse at rates above the IRS standard mileage rate.
What does this mean for your employees?
Your employees may not be receiving enough. A car allowance is not configured to their typical driving schedule or the region they have to cover. Many drivers may be over paid, while others will receive an amount too small to make up for their driving expenses. Being taxed, it’s even less likely to cover a mobile worker’s needs. And, with the passage of the TCJA, they can no longer deduct unreimbursed business mileage from their taxes. Many companies have paid out millions of dollars in lawsuit settlements over under reimbursed mobile workers. As more states fall in line with California and Illinois’ Labor Laws, companies want to guarantee their mobile workers the reimbursements they deserve.
What does this mean for your company?
Start looking for alternatives. A great starting point would be an accountable allowance program. While still a car allowance, an accountable allowance ensures a certain amount of driver’s reimbursements remain untaxed, granted the company submits the proper information.
But, if you’re interested in a vehicle program that provides the very best for your employees, look into a fixed and variable rate (FAVR) reimbursement program. Companies with FAVR programs use mileage reimbursement rates designed to the driver’s region and submitted trips. Interested? Learn more about FAVR!