Your company's car allowance policy is either helping or hindering your organization's objectives. Here are three ways to make sure your policy is optimized to fit your goals.
When your organization established its car allowance policy, it may have been several years ago under very different conditions. That's why it is important to review your policy every year and check to see that it is functioning in a way that supports your employees and your business operations. Conduct your annual review using these tips.
3 Tips to Improve Your Car Allowance Policy
When you conduct your annual review of the company vehicle allowance policy, there are three main angles to look at: financial goals, employee experience, and opportunities for growth.
1. Finances: Check your car allowance tax waste
Unless your organization uses an IRS-approved system of business substantiation, your vehicle allowance payments are taxable. As long as your vehicle allowance policy is a taxable program, then your organization will be hindered financially.
Vehicle allowance tax calculations
If you calculate your tax waste, you'll also be calculating your potential savings with a non-taxable vehicle allowance program. The key is to find out the total annual amount of tax withholding for the allowance itself. Remember to include both the employee and employer portions of payroll taxes (15.3%) and the average amounts of both federal and state income taxes.
If you do the math for your monthly car allowance amount, multiply it by 12, and multiply that by the total number of employees who receive a car allowance, you'll know the total annual tax waste. You can also try our free tax waste calculator if you want a quick estimate.
Savings from non-taxable car allowance options
Different types of non-taxable vehicle programs will save different amounts of money in tax waste. But here are the three main options to explore:
- Fixed and variable rate car allowance (FAVR)
- Mileage reimbursement at the IRS rate or lower
- Mileage substantiation for your car allowance
2. Employees: Compare expense and allowance
What is the purpose of a car allowance? It is not a business perk. It is a way to offset vehicle expenses for employees who must use a vehicle to do their jobs. It is fair to cover these expenses that rightly belong to the organization. In some states, it's a legal requirement. If expenses exceed the allowance amount, then you have a problem.
Employee vehicle expense calculations
Calculating your employees' vehicle expenses is easiest if you purchase vehicle expense data from a vendor. You can also have someone within your organization do a study that calculates the range of needs among employees.
It is easy to find out the average annual vehicle expenses nationwide just by doing a few Google searches. Your employees' business portion will depend on how much they use their vehicle for work purposes. But it might be in the ballpark of 5/7 of the amount.
More challenging is figuring out the range of expense amounts experienced by your organization's employees. Remember to calculate the business portion of all the following expenses: fuel, insurance, depreciation, maintenance, oil, tires, taxes, license, and registration.
Remember: Compare expense with after-tax amount
Remember to compare your employees' estimated expenses with the after-tax amount of your vehicle allowance. This is another reason why switching to a non-taxable plan can be a huge help to the organization: you can boost employees' take-home pay without increasing car allowance expenditures.
Making sure that your car allowance amount fully covers costs not only treats employees fairly, it also protects the organization from labor code violations in states that require full reimbursement of business expenses.
3. Growth: Add Enhancements to the Vehicle Program
It is easy to view a vehicle allowance policy as simply a perk or a business tool to help employees cover costs. But it can add a lot more value to your organization over the long run with a different view. Here are a couple of enhancements that can protect your organization as it grows.
Insurance verification
If your organization does not already have a written policy related to employee auto insurance, adopt one now. More importantly, enforce your policy. Requiring employees to maintain a minimum amount of car insurance protects both their assets and the company in the event of an on-the-job accident. And underinsured employee leaves the employer liable.
We recommend requiring a 250/500/100 car insurance policy and verifying employee compliance every six months. Verification can be as simple as requiring employees to upload their auto insurance declarations page every time their policy renews. If the insurance dec page has not been updated, you can pause car allowance payments until they upload the latest one.
Motor vehicle record checks
You can also enhance your vehicle allowance policy by adding a driver safety policy. This helps employees avoid accidents and also protects the organization from negligent entrustment suits in the event of an accident that causes significant injuries or property damage.
Run annual motor vehicle record checks or purchase a subscription to a vendor that continually monitors MVRs and sends out a notification when a violation has occurred. In the event of a violation, interventions could include a required driver safety course or termination of employment.
Improving your company's business vehicle allowance policy today
mBurse can assist your organization with making any of the improvements listed in this article. We offer FAVR vehicle allowance administration, vehicle expense data, and many other professional services including an insurance verification dashboard and MVR checks. Schedule a call today or visit our professional services page.
