Companies choose their business vehicle program for any number of reasons: cost control, ease of administration, benefit to driving employees. So what is a vehicle allowance? And why would a company use it as their business vehicle program? Let’s dive in.
Companies using a vehicle allowance provide their employees with a flat amount each month to cover the costs of driving their personal vehicles. The industry more commonly refers to it as a car allowance or a flat allowance. On average, companies paid $575 allowances to their driving employees in 2021.
Companies choose to use vehicle allowances because they’re easy to implement, easy to track and easy to upkeep. Employers simply decide on the amount they would like their employees to receive and send that amount each month. It’s on a dependable schedule, and its an amount the finance team can expect. If the company decides they want to raise it or need to decrease it, they can do so at the beginning of the next month.
First, vehicle allowances present a cost control concern. Because the payments are not tied directly to business mileage, the IRS considers them additional income. This means the company is taxed on each payment, and employees take home 35% less than the original amount. But lower monthly payments aren’t the only reason vehicle allowances are unfair to employees.
In most cases, companies have employees that live in different regions as an anywhere workforce. There is no country standard for the costs of operating a vehicle. Employees driving for work in a place with higher gas prices will spend more of their allowance than employees driving in places with lower gas prices. That inequity creates winners and losers. In fact, employees who find their allowance doesn’t even cover their driving costs are incentivized to drive less.
Some companies choose vehicle allowances. Others use them because they aren’t even aware there’s an alternative. Here are two options that help companies avoid the cost control and inequity of a vehicle allowance.
Companies can implement an accountable version of the vehicle allowance. With an accountable allowance, employees track their business mileage in IRS compliant logs. To make this process smoother, ideally businesses will automate logging miles with a mileage capture app. Allowances provided to employees will be un-taxable up to the IRS mileage rate. Any amount over that will be taxed as additional income.
Accountable allowances may no longer be a cost control concern, but there’s still the issue of fair employee reimbursements. Fixed and variable rate (FAVR) reimbursement programs provide the solution. This option reimburses employees for the fixed costs (taxes, license and registration) and the variable costs (tires, oil, gasoline) of driving. What’s more, industry experts calculate these rates specific to the employee’s geographic location. There’s a reason FAVR is the only IRS approved method for reimbursing employees for business mileage.
Your next steps depend on where your company is on the road to a new vehicle program. If you’re still window shopping, there’s plenty more to learn about vehicle allowances and the alternatives. If you’re ready to implement a vehicle allowance across the company, we strongly recommend exploring other options. Curious about FAVR? You can learn more about it here.