In 2024, more employees opt to use their own vehicles for work purposes, presenting both opportunities and challenges for employers. On one hand, employers who adopt this trend have the opportunity to reduce operating expenses while giving staff members more freedom.
On the other hand, there is the need to ensure regulatory compliance and protect against potential liabilities. This is why understanding how to create and enforce a fair car allowance policy is essential for business owners.
In this guide, we’ll cover everything you need to know about car allowance – from what it is to how to calculate it for your workers. We’ll also cover how Timeero’s features can simplify your car allowance management.
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Car allowances are monetary benefits provided by employers to cover expenses associated with operating a personal car for work-related purposes. The payment will vary based on your type of business and the kind of travel your company conducts. Employees receive car allowances regularly, often monthly, as part of their compensation package.
Car allowances are more simple to navigate than mileage reimbursements. Employees are paid a set amount for car-related expenses, regardless of the actual distance they drive. Whereas, for mileage reimbursements, employees are paid back for the actual expenses they incur based on the distances they cover. They are expected to keep track of their mileage and submit requests for reimbursement.
Employers may choose to implement car allowances in various ways. One way is using a flat rate, where a fixed amount is given to employees each month as a car allowance, regardless of their individual circumstances or mileage.
Another option is the tiered structure, where car allowances may vary based on factors such as job role, seniority, or geographic location. For example, employees in managerial positions or those working in regions with higher living costs may receive higher car allowances.
In some cases, car allowances may be tied to performance metrics, such as meeting sales targets or achieving specific business objectives. This is known as the performance-based structure, though it’s uncommon.
If you have employees nationwide, you may go for a “fixed and variable plan,” also known as FAVR, to ensure they are not over or underpaid. This plan can be tailored to fit each employee’s actual costs.
FAVR consists of periodic fixed payments which include payment for insurance, registration fees, depreciation, and taxes for the percentage of time the car is used for business. It also includes variable rates such as fuel, oil changes, tires, and routine maintenance.
What Costs Do Company Car Allowances Cover?
Car allowance covers the following expenses, though the specifics may change based on the employer's policies and industry norms:
Vehicle Depreciation: A portion of the allowance might be used to cover the car's gradual depreciation over time, which would represent wear and tear from regular business use.’
Fuel Costs: Mobile workers frequently use their cars to commute to meetings, client visits, and other work-related events. Therefore, the payment is used to cover these fuel expenses when the car is used for work.
Maintenance and Repairs: Every car eventually needs routine maintenance and unforeseen repairs. These may include fixing dents and scratches or replacing tires. To guarantee that workers can keep their cars in top condition for work-related activities, car allowances may factor into these expenses.
Insurance Payments: To reduce the financial strain on employees, employers may choose to include a percentage of insurance premiums in the car allowance.
Fees for Registration and Licensing: Some companies offer to help employees cover the registration, licensing, and other administrative costs of owning a car.
Taxes: To mitigate the tax implications of driving a personal vehicle for work, a portion of the car allowance may be assigned for tax purposes, subject to local laws.
What Is a Standard Car Allowance?
Various internet sources indicate that the average vehicle allowance was $575 in 2023. This was the same amount in both 2021 and 2022, indicating that there haven’t been any major changes. As of 2024, an employee's monthly car allowance for using their own car for work-related purposes typically varies from $300 to $600.
When deciding on a standard car allowance that complies with industry standards and suits the demands of their staff, businesses must do extensive research and take into account different variables. This includes the average cost of living in the area, average gasoline prices, and vehicle depreciation rates.
Is a Car Allowance Taxable Income in 2024?
Yes, a car allowance is generally considered taxable income at both the state and federal levels in the United States. The car allowance tax can significantly reduce the amount your employee gets to cover their vehicle expenses, even by 30-40%.
So, how much tax you’ll pay on car allowance largely depends on the method you choose to cover your employee’s vehicle use expenses. We’ve listed the most common tax implications below.
For instance, fixed car allowance is taxable income at both the state and federal levels. It is a fixed amount paid for employees’ vehicle costs. As both the employer and the worker must pay FICA/Medicare taxes, the amount your employees get to keep from their car cash allowance is much lower.
When reviewing a car allowance policy, the employer must confirm that the employee’s take-home pay can cover their actual expenses, not just the pre-tax amount. But, simply raising the car allowance may not be the most effective solution. While it may increase the employee’s take-home pay, it can also result in higher costs and taxes for the employer.
So, instead of focusing solely on the car allowance amount, employers should consider alternative solutions to accurately reimburse business expenses and improve efficiency.
As an alternative, some employers use fuel reimbursement or company gas cards for employees. However, this method is also taxable unless the employees log business mileage. In certain situations, companies that opt for such a solution might even need to charge back or tax their employees for any personal use of gas.
But what are the non-taxable alternatives?
Employers can avoid taxation by setting up the standard mileage reimbursement plan and following IRS reimbursement rules. The mobile employees then get a car allowance in actual business mileage multiplied by the mileage rate. The amount is tax-free if it does not exceed the IRS standard mileage rate of 67 cents per mile for 2024.
Alternatively, if they meet the minimum requirements of five mobile employees conducting more than 5,000 miles for business-related purposes annually, employers can opt for a non-taxable FAVR program.
But accurately tracking employees’ mileage is crucial to deducting taxes and making your mileage reimbursement policy more efficient. The reasons are numerous, and we will mention a few.
First, it grants your employees the appropriate reimbursement as they will get paid for each mile.
Second, in the case of an audit, you will need to have a transparent record of the business miles as proof of your tax deduction.
Third, with timely insight into the mileage, you can control your car expenses.
Offering a set allowance provides financial predictability for employees since they receive a fixed monthly amount.
It eliminates the need for employees to track mileage and submit reimbursement claims.
Car allowances, like other allowances, serve as an attractive incentive for recruiting workers and retaining them.
Cons:
The vehicle allowance may not accurately reflect the actual expenses incurred by employees, especially for those who drive more frequently.
Employees bear the responsibility for all additional vehicle-related expenses, regardless of usage.
Mileage Reimbursement
Pros:
Reimbursing employees offers a more equitable reimbursement structure, as they are compensated based on actual mileage driven for business purposes.
Businesses use mileage reimbursement programs because they are relatively simple to set up tax-free. All a company has to do is make sure reimbursements are made at the annual IRS mileage rate.
Cons:
Mileage reimbursement requires employees to track mileage for work and submit reimbursement requests, which can be time-consuming.
It may result in varying reimbursement amounts from month to month. This unpredictability may lead to financial uncertainty for employers.
Ultimately, the decision between a car allowance and mileage reimbursement depends on the specific needs and preferences of both employers and employees.
How Can Timeero Help Manage Car Allowances?
Optimizing the allocation of car allowances is critical for companies looking to maximize resources and guarantee employee satisfaction. You want to ensure that your staff members are fairly compensated for any business-related use of their personal vehicles.
This can be accomplished by computing the actual cost accrued by your staff, taking into account the precise mileage and other location-specific expenses. Timeero is an ideal software solution that helps streamline business operations and simplifies these calculations for you by providing accurate and reliable data.
Let’s take a look at some of Timeero’s features that are useful when managing car allowances:
Effortless Tracking
Timeero makes it easier to track your employees’ working hours, especially the hours of those who use their personal cars for work. Workers can easily clock in and out on their smartphones, and their hours are monitored automatically.
With Timeero timesheets, you can see how much time an employee spends working on job tasks, as well as any overtime or breaks they take. This feature is essential for businesses offering car allowances, as it helps ensure that employees are not working excessive hours or taking unauthorized breaks while on the road.
Additionally, the app has a mileage tracker, which accounts for every mile traveled while on the clock.
Mileage tracking on Timeero.
The mileage records contain all the information required by the IRS. Workers with access credentials can make changes to their mileage logs, but the Activity Log will retain a record of all changes.
In addition to regulatory adherence, the Activity Log contributes to the transparent and fair distribution of car allowances, fostering trust and accountability within the workforce.
Segmented Tracking
With Segmented Tracking, Timeero offers a seamless solution to simplify the process of monitoring and verifying employees' whereabouts. Your workers can easily clock in at the start of their workday, and Timeero automatically logs their trips based on GPS data.
Segmented Tracking eliminates the need for employees to log manual entries at each location, significantly reducing the time spent on recordkeeping and decreasing the risk of forgetting to log mileage.
This is an efficient solution for managing car allowances because it records all locations visited and distances covered over time. Managers can use this information to update or modify existing car allowance policies.
Timeero’s segmented tracking feature.
Geofencing Precision
For employees who frequently travel to different locations for work, Timeero's geofencing feature helps employers ensure that employees are where they need to be. This feature can be particularly useful for monitoring employees who receive a car allowance to cover business travel expenses.
So, how does this feature work?
A geofence is a virtual border around a designated area. Once you map out the area, you can monitor when employees arrive and depart from the site.
Timeero notifies employees to clock in and track their time at the worksite once they enter the designated geofence zone. The app also alerts workers to clock out when they leave the geofenced region. Businesses can use this functionality to prevent fraudulent time reports from employees or overbilling.
A geofenced job site (Admin view).
Location History
Timeero uses GPS technology to pinpoint each employee's location when they're clocked in. Using timestamped breadcrumbs, you can see your employees' journeys in real time or review them later.
You will be able to spot if a worker takes the longer, more scenic route or if they make unauthorized personal stops. This data affects your car allowance policy in terms of how much each employee should receive based on their amount of daily travel.
The Timeero Breadcrumbs feature.
Suggested Mileage
One excellent tool Timeero provides is the suggested mileage feature, which can help you minimize your expenses by displaying the shortest path to a destination. This feature allows you to quickly see the mileage difference between the shortest and actual route.
Suggested Mileage proves useful in handling car allowance because it helps your employees save on fuel costs. Employees also spend fewer hours on the road taking longer routes, which allows them to be more productive in the long run.
The suggested mileage feature on Timeero.
Reporting
While using Timeero's advanced reporting options, managers can generate detailed mileage reports tailored to their specific needs. Whether you need a breakdown of mileage patterns or a summary of your monthly mileage expenses, these reports provide insightful information about how your business operates.
With relevant data at your disposal, you can identify cost-saving opportunities. For instance, if your employees hardly move from one location to another for work, you can reduce the amount of car allowance you set aside each month. This money can instead be used to grow other aspects of your business.
A mileage report on Timeero.
Payroll Integration
Business owners can effortlessly transfer their mileage data for processing by integrating it with other apps. Integrating with payroll or accounting software can automatically sync mileage expenses, improving the accuracy and simplicity of expense reports. This can help owners better understand their operation processes, conserve company time, and prevent mistakes.
Integrating with payroll apps makes it easy for employers to calculate and make car allowance payments along with regular payroll. On top of guaranteeing accurate and fair vehicle reimbursements, this integration ensures that employees receive their allowances in a timely manner.
Timeero integrates with several payroll software options, including:
Use Timeero to Simplify Handling Car Allowance For Employees
Don't let the administrative burden of handling car allowances slow you down. Timeero, one of the best mileage tracking apps, offers a comprehensive solution to increase efficiency.
Through the automation of operations related to mileage tracking, reporting, and reimbursement, this software enables businesses to maximize the benefits of their car allowance programs. This is all while simultaneously increasing worker satisfaction and output. Check out our detailed Timeero review for more information on how this solution can benefit your business.
Automate mileage tracking and avoid inaccurate reporting
Emily Maina is a tech-savvy writer with a passion for creating content. With years of experience in the industry, she is well-versed in the latest trends and developments in the tech industry. When she’s not working, Emily enjoys exploring the great outdoors or watching her favorite shows.
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