Over time, a car allowance can resemble a snowball rolling down the side of a mountain. It starts small and simple, but leads to far-reaching—and sometimes destructive—consequences.
The concept is simple and straightforward: pay mobile employees a set amount each month to offset travel expenses. The simplicity of a car allowance is its most distinct advantage. But as time passes, this simple plan accumulates some complicated problems. Taxes and uneven expenses affect each employee’s net allowance, often leading to behaviors that hinder productivity. Time passes, and before you know it, your car allowance has quietly and unexpectedly flattened your growth.
Let’s do the math and examine the various unforeseen consequences of a flat car allowance.
- Tax waste
If mobile employees receive a flat taxable car allowance, they can expect to take home significantly less than the amount provided due to tax waste. Depending on an employee’s income bracket, he or she could be paying anywhere from 25% to 39.6% of the car allowance to the IRS. For a $500/month allowance, that could leave the employee with somewhere between $375 and $302—that’s it. Plus, the company incurs additional expense in the form of payroll taxes on each allowance.
- Expense fluctuations
Over time, an employee’s travel expenses will change—and they tend to increase rather than decrease. Gas prices, insurance costs, and maintenance costs change from year to year. An allowance amount that worked two years ago might be entirely inadequate now.
- Cost inequalities
Different employees experience different costs. The more widespread the company operations, the greater diversity of employee expenses. Some employees work in expensive areas, and some cover larger territories than others. Chances are, an allowance that works in one geographical location will not work in another.
The snowball effect emerges when, over time, employees increasingly find that their allowance does not cover their expenses. This will lead to one or more threats to productivity and growth, from unproductive work habits to employee attrition.
If mobile employees’ costs are not being covered, they may opt for phone calls and webinars over face-to-face meetings, engage in travel blocking that prioritizes employee efficiency over client relationships, or even worse, leave the organization.
If there is a gap between costs and allowance, employees may opt to put off business travel until they are in the area, sacrificing new opportunities and established relationships to protect their own financial situation. The productivity losses and costs to the company can be astronomical.
Protect employees, protect productivity and growth
Your mobile employees operate on a system of trust. As they work to create success for your organization, they trust you to ensure their business needs are met. Car allowance and reimbursement plans help them to feel comfortable traveling to meet current and potential customers and moving between your locations.
Their mobile offices are also their personal vehicles, and they trust you to protect this personal and professional investment. A fair and equitable reimbursement program ensures that trust as well protecting employee’s income from the high costs of owning and operating their personal vehicles. Provide this protection, and you’ll prevent productivity losses and retain top employees.
Ways to prevent the car allowance “snowball”
- Benchmark your car allowance against costs at a minimum of every two years. Costs change, and so do territory sizes. It’s best to re-evaluate your car allowance policy to ensure it is keeping up with all employees’ costs
- Evaluate each employee’s actual needs, and provide a car allowance based on their costs as well as their driving territory sizes.
- Measure business travel ROI. Make sure employees are remaining productive and that their business trips yield business value.
- Switch to a non-taxable reimbursement plan. Taxes by far have the biggest effect on an employee’s net allowance. Cut out the IRS, and you can save the company money while boosting employee benefits.
The concept of a non-taxable reimbursement plan may sound complicated, but the potential gains in savings, productivity, and growth will be well worth it. Find out how mBurse can help you craft and manage a non-taxable plan.