What is your car allowance amount based on? If it’s not based on data, you could be in trouble. You may be overpaying or underpaying. Here's how to obtain the benchmarking data you need.
Why benchmarking data is needed for car allowances
The car allowance is an important part of a mobile employee’s benefits package. It protects the employee’s income from the high costs of operating a personal vehicle for work. An employer should carefully consider vehicle expense data to supply an appropriate allowance amount.
However, over the years, our car allowance surveys have consistently found that only around 25-30% of employers use vehicle expense data to set their organization’s allowance amount. Most respondents said it was a random amount or didn’t know where the number came from or had just based it off of a competitor’s allowance. How do they know whether they are offering a genuinely fair car allowance?
What is a fair and competitive car allowance?
To determine a fair and competitive car allowance amount you need to know your employees' actual business vehicle expenses. It also helps to know the range of allowance amounts being issued by similarly-sized organizations, especially organizations in your industry.
This is where automotive cost benchmark data can help. With accurate vehicle expense data for 2024, you can confidently set your optimal car allowance. Start the process of obtaining a benchmarking report below, or read the rest of the post to learn about the risks of setting an allowance amount without data.
Costs of calculating a car allowance without benchmark data
Basing a car allowance off of data serves the interests of both the employer and the employee. The costs of operating a vehicle for work involve a variety of constantly changing factors. An amount that worked yesterday may not work tomorrow. An amount that fits the organization’s budget might be straining the employee’s budget. An amount that works for an employee in one state might not work for an employee in another state.
All of these disparities can lead to problems.
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Standard car allowance - overpaying and underpaying
One recent survey found that 77% of respondents had not changed their car allowance in the last ten years. During that period, inflation has risen significantly. A $600/month allowance is now worth only $456/month in December 2013 dollars. During that same period, the average price of gas has fluctuated between $1.70/gallon and $5/gallon.
But it’s not just chronological cost differences; it’s also geographical cost differences. Gas in California runs about a $1.50 higher per gallon than the average U.S. price of gas. Insurance rates, personal property taxes, and maintenance/repair costs also run higher in some locations than others. Using a standard, unchanging car allowance to address dynamic and diverse expenses creates inequalities between employees.
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Attrition and productivity losses due to vehicle allowance
If expenses outstrip the car allowance, employees will take steps to protect their finances They may opt for fewer face-to-face meetings and schedule travel in ways that benefit the employee more than the company or the client. Or they may leave for a job with a more robust compensation plan.
Decreased productivity proves costly over time, as does hiring new employees. It is estimated that hiring to replace a valuable employee can cost 1.5 to 2 times their annual salary. Plus, if employees realize the inequalities of their situation, morale will dip, exacerbating the situation.
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Car allowance lawsuits due to labor code violations
If your car allowance isn’t based on data and underpays some employees, legal consequences could ensue. California, Massachusetts, and Illinois require employers to indemnify employees from all work-related expenses. Other states have employee-friendly reimbursement laws as well. Failure to fully reimburse employees for business travel can lead to labor code violations, penalties, and lawsuits.
If your car allowance isn’t based on data, how can you be sure you are fully covering employees’ expenses? Try this calculator to check your risk level.
How to obtain car allowance benchmark data
In 2020 the median car allowance was a bit under $600 per month; has yours adjusted for the high inflation over the past three years? To ensure that your allowance is competitive, you need access to allowance amounts paid by both competitors and similarly-sized companies, as well as vehicle expense data. mBurse can help you obtain this data (see button below).
Note, however, that a $600/month allowance gets hit hard by taxes. Employees are probably taking home somewhere between only $375 and $450 after taxes, and the organization is paying payroll taxes on the $600 as well. Switching to a non-taxable reimbursement plan could mean paying the same or less per month while using eliminated taxes to increase employees’ take-home pay.
Switching to a non-taxable reimbursement plan could save everyone money while fully covering employees’ expenses. Contact mBurse today to find out how to implement a non-taxable plan. If you aren’t ready to take that step, ask us for a free report that benchmarks your current car allowance amount to industry standards. Or go further and do a full audit of your current car allowance, plus a benchmarking report and a recommended rate for 2024.