If your organization currently pays a car allowance to its employees, here are five resolutions for 2021. Following these steps will benefit employees and prove a good investment in the new year.
1. Save money with a non-taxable car allowance.
Right now, many American workers are getting pinched by the uncertainties surrounding the pandemic economy. Businesses in many industries are looking to cut costs. Switching from a taxable car allowance to a non-taxable one will help with both needs.
All that money that was going to federal and state taxes (often as much as 40% of the car allowance) can mostly be divided between the employee and the employer. The employee gets a larger benefit, and the employer has more to invest in the company's mission. Everyone wins.
2. Use expense data to optimize the allowance.
It's common to pay a standard car allowance that's either based on a competitor's amount or based on past car allowance amounts. However, vehicle expenses are always changing, and some are less visible than others.
For example, did you know that vehicle depreciation, auto insurance, and registration/license fees should factor into a fair car allowance amount? It is important to use vehicle expense data to accurately estimate how much allowance employees will need to receive in order to fully have their vehicle-related business expenses covered.
3. Use a standard vehicle rather than a standard rate.
Most organizations that pay a car allowance pay a standard monthly rate to employees. But this creates inequalities. Employees who drive higher mileage amounts may be underpaid relative to employees who don't drive as much. Similarly, employees who work in regions with higher vehicle expenses (especially gas, maintenance, and insurance rates) may also experience a shortfall while those in less expensive areas get a windfall.
Employees who drive electric vehicles may also find that they receive a better benefit relative to employees who don't. Inequities like this can be resolved by using a standard vehicle to derive rates – a vehicle particularly well suited for the job. But an additional step is needed to resolve inequities.
4. Adopt a customizable car allowance.
Once you have a standard vehicle and know which expenses need to be included in the allowance amount, you still need to create a way to address the mileage-based and geographically-based expense differences. This requires customizing the amount of allowance to each employee.
It may sound complicated, but you can individualize the rates a bit more and largely eliminate the inequities if you use the data for that standard vehicle to determine two things:
- the expense level for each region represented by employees
- the average expense within each band of employee mileage (e.g. 500-1000 miles/month, 1000-1500 miles/month, etc.)
Read more: Regionally based vehicle expense differences.
5. Choose a responsive, flexible car allowance.
Gas prices rise and fall, as do many other expenses. The pandemic of 2020 kept many workers at home, conducting far fewer in-person meetings, which meant fewer business miles driven. In 2021, we will continue to see unpredictable and unusual circumstances. It seems only right that a car allowance should stay responsive.
This means re-evaluating the and adjusting the allowance amount every few months to make sure it's keeping up with the employees' needs. Even in a normal year costs can fluctuate unexpectedly or even dramatically. An optimized car allowance stays aligned with employee expense needs year in and year out.
Conclusion: Review your company car allowance
To help you to identify which recommendations would prove most helpful to your organization, try our three-step, self-guided review of your company car allowance.
Or, if you are interested in exploring an mBurse administered car allowance that will boost employee benefits while bringing significant ROI in 2021, select the button below.