4 Reasons to Update Your Car Allowance Policy for 2023

Written by mBurse Team Member   |   Oct 10, 2022 7:00:00 AM
2 min read

The year 2022 brought record-level vehicle expenses, which has put a lot of financial stress on employees who drive as part of their jobs. How has your organization responded? Here are four ways to update your car allowance policy for 2023.

Record-highs in vehicle costs mean updated car allowances for 2023

High gas prices and inflation in vehicle prices have placed a lot of financial stresses on mobile employees (employees who operate a vehicle to fulfill job responsibilities). Unless their employer offers a car allowance that increases with increasing costs, these drivers now find their car allowance worth less than last year, even significantly less than two or three years ago.

While gas prices have subsided since the rapid spike from March through July of 2022, they are still averaging around 70 cents higher per gallon than this time in 2021. The average price of almost $4 per gallon is historically high, with no sign of abating soon. And the prices of both new and used vehicle continue to remain at record-high levels.

These realities should cause you to re-evaluate your car allowance policy for 2023. 

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4 reasons to update your car allowance for 2023:

  1. Vehicle cost inflation nationwide

As we've already established, gas prices remain high, and with recent cuts in production targets by OPEC, should continue to remain high. At the same time, the prices of new vehicles have hit yet another record high, with the average transaction price hitting $48,301 in August. Used vehicles continue to run high with an average transaction price of $28,061.

The prices of vehicle maintenance and repair are also soaring, due to a combination of causes: supply chain shortages, increased complexity of vehicles, an increased preference for OEM parts, and increased labor rates compounded by a shortage in auto technicians.

  1. State labor codes that indemnify employees from vehicle expenses

California, Illinois, and several other states have employee-friendly labor laws (such as RI, MA, NY, and MI). As employees complain about car allowances falling short of vehicle costs, other states may pass similar expense indemnification laws. If your car allowance does not fully reimburse employees, your employees will be feeling the pinch of inflation. Employees in employee-friendly states can hold the company accountable under their labor code, via violation complaints and lawsuits.

Car Allowance Labor Code Calculator

  1. Attrition rates due to inflation of vehicle costs

Even if your employees do not work in jurisdictions that offer legal recourse for under-reimbursement, there's still the issue of competitiveness. Your employee car allowance either helps you or hurts you in attracting and retaining top talent.

If your organization doesn’t reimburse employees properly, your employees may look for work elsewhere. Losing experienced employees can get expensive in both the loss of revenue from reduced productivity and the costs of finding and training new employees. (There are four tell-tale signs to indicate whether your car allowance is competitive.)

  1. Regional variations in vehicle costs

Paying the same car allowance to employees operating in different regions and driving differently-sized territories can create huge inequities in compensation. Right now, gas prices are averaging $3.25/gallon in Texas. In California, the average is $6.35/gallon. The costs of maintenance, insurance, and taxes on vehicles can also vary widely across the country.

When you add in the fact that employees are paying taxes on their car allowances, the shortfalls experienced by employees in more expensive areas are exacerbated. The key is to make sure that whatever amount you are paying is calculated based on both the take-home pay after taxes and the likely average expenses for drivers in specific regions.

A competitive car allowance in 2023 - flexible, non-taxable

It is vital to offer a car allowance that is sufficient to cover the expenses of workers who live in expensive areas. But to keep it affordable, you need to avoid overpaying workers in less expensive areas. Switching to a flexible, non-taxable car reimbursement is the best way to meet both criteria.

By switching to a non-taxable car reimbursement, you may not have to increase your employee car allowance amount, except in very expensive regions. The same payment sum suddenly becomes worth 40% more to the employee (assuming that around 40% of the allowance was going to taxes).

Now is the time to make changes to your business vehicle policy. Labor laws like CA Labor Code 2802(a) and the Illinois Wage and Payment Collection Act require employers to “reimburse an employee for all necessary expenditures” they incur for completing the duties of their job. 

Now vehicle expenses have increased significantly, and the current labor shortages in some industries are giving employees the ability to command more robust compensation. 

The easiest solution is a flexible, non-taxable car allowance, also known as a FAVR plan. Here's a calculator to determine how much a non-taxable car reimbursement would save compared with your current taxable car allowance:

Car allowance vs. FAVR Reimbursement

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