Why Is It Important to Review Your Car Allowance Policy?
Since the Tax Cut and Jobs Act, deducting business mileage on the tax return has been eliminated for the tax period 2015-2018. Your employees can no longer use their previous year’s business mileage to reduce their taxable income.
The tax reform has caused a loss of income for many employees. Previously they could keep track of their business mileage and deduct the equivalent of the IRS mileage rate on the tax return.
Financial uncertainty caused by the pandemic and increasing inflation has complicated matters further, leaving employees worried about their finances and future.
The odds are that unsatisfied employees, such as the ones whose car allowances do not meet their expenses, will leave for companies that fully reimburse them.
In some states, such as California or Illinois, labor laws protect employees’ rights and require full business expenses reimbursement, so companies can even face lawsuits and labor code complaints.
To avoid such adverse outcomes, make it your goal to review your car allowance policy. By reimbursing your employees fairly, you provide certainty to your valuable employees and your company.
How Does Car Allowance Work?
Car allowance reimburses employees’ costs for using their personal vehicle for work-related purposes. These expenses include fuel, maintenance, and other costs of operating a vehicle.
The payment will differ depending on your business - the type of travel your business requires and how the refund is set up.
Some business owners may think they can cut costs by giving employees a low car allowance or no mileage reimbursement. But this can backfire on them in the long run, harming their reputation and ability to attract and keep the best employees. They may also hurt their company’s productivity and efficiency.
Moreover, employees who don’t get enough car allowance to cover their expenses may resort to risky choices.
For instance, they may opt for the lowest insurance coverage required by the state. This can expose the company to liability and costs if the employees get into an accident while driving for work. Employees who are underpaid for their mileage may also reduce travel frequency, affecting their performance.
However, before setting up your car allowance policy, or reviewing the existing one, check the laws in your area. Some states have regulations requiring you to reimburse workers for business miles using their cars for work.
As mentioned, California Labor Code 2802 demands reimbursement of all reasonable costs, such as ownership and operational expenses, insurance, etc.
Even though most of the states do not have such requirements, car allowance is a common practice. Refunding employees for their expenses for operating a vehicle for business use is considered fair. Whether you offer mileage reimbursement or a flat monthly amount, a mileage allowance is an essential benefit.
However, when reviewing your existing or setting up your car allowance policy, it’s essential to remember that income taxes also apply to car allowances.
One of the crucial steps is to consider how taxes are related to the car allowance method you choose and how they can impact the amount your employees take home.
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 US.
In the US, 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 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 reimburse business expenses and improve efficiency accurately.
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.
According to different internet sources, the average car allowance in 2023 was $575, the same as the previous year.
However, there are many reasons why you should consider reviewing your car allowance. In recent years, several global disruptions affected driving-related expenses, such as COVID-19, tensions in Asia Pacific, and the war in Ukraine.
For example, fuel prices rocketed, reaching the highest price since 2014 - in October 2021, Americans were paying $1 more for a gallon than in 2020. On the other hand, the expense of insurance continued to increase. At the same time, various disruptions in the supply chain kept depreciation costs at a very low level.
Even though gas prices started to stagnate or decrease in 2022, it may happen that even if you use the IRS mileage business rate, the average car allowance in 2024 won’t be enough to reimburse all vehicle-related expenses.
How to Calculate Car Allowance for Employees?
To correctly calculate the car allowance amount, you must know what expenses it should cover. If your company issues vehicles, your employee vehicle allowance will need to reimburse a much narrower set of expenses.
When paying a reimbursement or car allowance to cover the use of a personal vehicle, the following expenses should be factored into your rate:
fixed costs, such as depreciation, insurance, registrations, various fees, and taxes
variable costs such as fuel, oil, tires, and maintenance.
What Is the Best Car Allowance Fit?
Remember that employees’ vehicle-related costs vary from one geographical area to another and that some of the expenses also depend on the type of vehicle. That’s why it’s hard to find a one-size fit solution.
Let’s take, for example, the IRS mileage rate. It is based on an annual study of variable and fixed car use costs. These costs include insurance, maintenance, depreciation, repairs, gas prices, tires, and oil.
However, when your employees receive the same mileage rate for two different territory sizes and locations, there might be an inequitable difference in their take-home pay.
If you use the standardized IRS mileage rate, remember that it can lead to excessive driving, as with high-mileage drivers, ﬁxed costs spread out over a larger number of miles.
These drivers can cover their costs more efficiently than those who drive lower miles.
If you have employees across the country, you may opt for a “fixed and variable plan,” also known as FAVR, to ensure they are not over or underpaid. FAVR plan can be tailored to fit each employee’s actual costs.
FAVR consists of the following:
Periodic fixed payments - insurance, registration fees, depreciation, taxes for the percentage of time the car is used for business, and
If your workers travel for business purposes in and from various geographical locations, their travel expenses also need to be treated as location-specific.
The Importance of Accurate Mileage Tracking
Even if you reimburse your workers using an IRS-standard mileage rate, it does not necessarily protect your company from the potential negative consequences of inaccurate mileage tracking.
The main weak point of mileage reimbursement is self-reported mileage. Still, many organizations rely on manual mileage tracking and use various mileage log templates and spreadsheets to record and calculate employee mileage.
However, this method carries many vulnerabilities, the most common being:
Mileage overestimates. The validity of self-reported driving exposure is highly questionable, which research has also confirmed. Self-reported mileage is often based on guesstimates, resulting in overestimating miles. Also, some employees can inflate their miles on purpose to compensate for increased costs.
Untimely reporting. Mileage is often calculated and reported weekly, sometimes just twice a month. But, if your employees do not record mileage right after their trip, they will most likely forget the exact routes or make calculation mistakes.
Mixing up personal and business mileage. Your employees may sometimes take detours for personal purposes. Some will leave these miles out of their mileage calculations, but others won’t.
Logging and keeping reports. The days of paper logs are far behind us. It takes too much time, space, and energy from every single employee who has to deal with the manual mileage logging and their further processing.
So, What Are My Next Steps to Accurate Car Allowance?
If your employees use their private vehicles for business purposes, you want them to be paid fairly for their expenses. You can achieve this by reviewing your car allowance policy.
The first step is simple - you must calculate your employees’ actual costs, considering the exact miles and other location-specific expenses.
This way, you will determine whether your car allowance covers the costs or if you have a
potentially unsatisfied employee ready to churn or file a lawsuit.
And if you don’t find this calculation simple, you lack reliable data. Best GPS mileage tracking apps, such as Timeero, will never again leave you with doubt about how many miles your employees traveled for business purposes.
How Can Timeero Help Me With a Fair Car Allowance?
To fairly compensate your employees for expenses, forget about relying on an average car allowance for 2024. Instead, base your approach on a solid mileage reimbursement policy and real and accurate data.
Timeero can help you gather reliable and relevant mileage-related data and use it to benefit your employees and your company.
So, what does Timeero offer when it comes to reimbursing employee mileage?
Timeero’s mobile app lets your employees track their mileage for work accurately. All they need to do is clock in when their work day begins and clock out when it ends. The app will recognize driving speed and capture all business-related mileage.
The mileage logs are created automatically and include all the necessary data IRS requires. Employees with such credentials may edit their mileage logs, but all edits will be saved in the Activity Log.
You can quickly generate mileage reports and transfer mileage expenses to payroll software for reimbursement. Timeero integrates with ADP, QuickBooks Online and Desktop, Xero, Viventium, Rippling, Paylocity, Paychex, and Gusto. If you need to transfer your data to another payroll software, Timeero offers Public API.
Timeero captures location with GPS precision. You can see your employees’ routes in real-time or review them retrospectively, using timestamped breadcrumbs. If an employee runs some personal errands or takes the longer scenic roads, you will know.
With the Segmented Tracking feature, you can get a detailed overview of your employees’ activities during their work hours: all the business trips, with the mileage and duration, and time spent on specific jobs and locations.
Timeero improves your employees’ mileage accountability by suggesting the shortest distance to their destination and comparing the actual and the recommended mileage.
Timeero is more than just a mileage tracker. It is also a comprehensive field workforce management tool that can help you with timekeeping, scheduling, PTO tracking, and more.
If you want to learn more about Timeero’s amazing features and benefits, check out our Timeero Review. Or better yet, sign up for a free trial and see how Timeero can transform your business - no strings attached.
Automate mileage tracking and avoid inaccurate reporting
Andjelka is a sociologist turned digital marketer. She specializes in creating content for SaaS and software companies. When she’s not researching the most effective employee management techniques, Andjelka loves cooking, reading, and fighting for human rights.