Every business vehicle program needs a checkup from time to time. Whether you pay a car allowance or mileage rate or other form of reimbursement, it is vital to periodically assess the health of your program. Here are three questions to ask.
Each method of offsetting employees' business vehicle expenses has a weakness, so one of these questions diagnoses a weakness of typical car allowances while the other diagnoses a weakness of typical mileage reimbursement programs. The final question applies to any program.
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.
In today's inflationary economy, it is vital to look for ways both to reign in costs while ensuring that employees are sufficiently compensated. 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 7.65% 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. You simply reinvest the money that was going to taxes back toward employees – without necessarily having to increase payments overall.
The Achilles heel of a mileage reimbursement is the fact that it cannot accurately reimburse low-mileage drivers and high-mileage drivers. In the one case, you end up under-reimbursing, and risk losing good employees. In the other, you end up spending more money than you need to.
Under a standard mileage reimbursement plan such as the IRS mileage rate ($.675/mile for 2023), unless an employee drives a certain minimum number of miles, they will not receive a high enough payment to cover the fixed costs of vehicle ownership that remain relatively unaffected by how much the person drives. Examples would include auto insurance, depreciation, and taxes and fees like license and registration.
Switching to a fixed and variable rate reimbursement could solve this problem while reining in unnecessary expenditures directed at employees who drive high amounts. Also known as FAVR, fixed and variable rate policies separate costs into fixed (ownership) and variable (operational) and reimburse both. That way, whether an employee drives a lot or a little, they are all reimbursed sufficiently and equitably. It is the fairest and most accurate way to reimburse vehicle costs.
Company size, priorities, and mission can change dramatically over time. Is your current business vehicle program designed for the state of your organization 10 years ago? Or has it been designed with the current and future conditions in mind?
Both standard car allowances and mileage reimbursements have scalability issues. As a company grows and the reimbursement needs of its employees diversify, the less a standardized payment or rate can handle those needs. This is especially the case when an organization expands into new regions where vehicle-related costs are different from the home location, or when employees take on new territories that make them outliers in terms of mileage amounts or location-based expenses.
This is a 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 drive a lot or a little and whether they work in an expensive location or a more affordable location.
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.