3 Questions to Ask about Your Car Allowance or Mileage Reimbursement

Written by mBurse Team Member Mar 23, 2020 7:15:00 AM

With the COVID-19 pandemic hitting the United States, it's no longer "business as usual." As painful economic losses mount and more people work from home, we are entering an unprecedented phase. What will this mean for companies that provide a car allowance or reimbursement?

Changes to sales, deliveries, and vehicle reimbursements

As increasing numbers of Americans work from home, sales trips and face-to-face visits with clients are dropping significantly. In some industries deliveries are increasing as more and more individuals and businesses rely on delivery of supplies. Depending on the industry, you may have employees driving far less than usual or more than usual.

Until we reach a "new normal," it is difficult to predict what the future will hold. In the meantime, organizations nationwide will be re-evaluating their priorities as well as their costs. If your organization pays a car allowance or vehicle reimbursement to employees, that policy may not be at the top of your priority list, but it still should get a look in this challenging economy.

When the time comes to evaluate your company's car allowance or mileage reimbursement policy, here are some questions you should ask.

1. If you pay a car allowance, is it taxable or non-taxable?

This is perhaps the most important question to ask about your vehicle reimbursement policy. If your company pays a standard car allowance without business substantiation of mileage, then it is most likely treated as taxable income for employees.

As we enter an economy in which more businesses will need to cut costs, switching from a taxable car allowance to a non-taxable vehicle reimbursement could save money and benefit employees at the same time.

Employees lose 30 to 40% of a standard car allowance to taxes, and the company pays 7.5% in FICA taxes on top of that. Switching to a non-taxable plan would allow the company to decrease monthly expenses while increasing workers' take-home pay.

If employees who drive as part of their jobs are currently working from home, it is important that the car allowance still covers the basic costs of car ownership (insurance, depreciation, registration, etc.). Even if the employee is not actively accruing mileage-based costs (fuel, maintenance, etc.), the job has required a personal vehicle and will require one as travel restrictions moderate.

Computer mouse on desk selecting step 1

2. If you pay a mileage reimbursement, is it meeting the expenses of low-mileage drivers?

If you have employees who are driving less because of travel restrictions related to COVID-19, your mileage reimbursement plan might not keep up with their overall vehicle expenses. Here's why: If an employer requires an employee to use a personal vehicle for work purposes, then the employer needs to reimburse not only the operational costs but also the fixed costs of ownership, such as auto insurance, depreciation, and car taxes and fees.

Under a standard mileage reimbursement plan such as the IRS mileage rate ($.575/mile for 2020), unless an employee drives a certain minimum number of miles, they will not receive a high enough payment to cover these fixed costs. The decrease in the cost of gas right now will help but will not be sufficient to offset a significant decrease in miles driven.

Switching to a fixed and variable rate reimbursement could solve this problem as well as position the company well when travel restrictions are lifted. Also known as FAVR, fixed and variable rate policies separate costs into fixed (ownership) and variable (operational) and reimburse both. That way, even as gas prices fluctuate and mileage fluctuates, employees are reimbursed sufficiently for their fixed costs. It is the fairest and most accurate way to reimburse vehicle costs.

Traffic and FAVR

3. Does your current business vehicle reimbursement policy fit the company?

In these volatile times it is important to have a vehicle reimbursement policy that is flexible and customizable. Company sizes, priorities, and missions are changing rapidly right now. Employee needs are also changing. Different parts of the country are being affected at different rates by the spread of COVID-19 and containment policies.

It will be important to maintain a vehicle reimbursement approach that is flexible enough to handle the current challenges as well as a "new normal" in the future – one that is fair to employees and sustainable for the company.

This is another reason to consider adopting not only a non-taxable plan but also one that allows customization and tailoring reimbursements to employees in different situations – whether they are driving more or less now, and whether the focus of their responsibilities is shifting or staying the same.

The only way to achieve this flexibility is through a plan that tailors vehicle reimbursements to employees' expense needs, rather than applying a one-size-fits-all approach. In all times, different parts of the U.S. experience different levels of vehicle costs. Prices of fuel, maintenance, and insurance can vary widely geographically. 

Best practice is to derive customized car reimbursements from expense data for each employee's geographic region and to separate the ownership costs (fixed) from the operational (variable). It sounds complicated, but a good program administrator makes it easy. Contact mBurse today to find out just how easy a fixed and variable rate plan could be to implement for your organization. 

Car allowance vs. FAVR Reimbursement

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