Over time, an auto 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. That's why it's important to benchmark your company's car allowance as part of an annual review.
Reasons to conduct an annual car allowance review
The vehicle allowance concept is simple – 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 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 standard, flat vehicle allowance.
A taxable auto allowance brings tax waste.
If mobile employees receive a car allowance that stays the same each month, they can expect to take home significantly less than the amount provided due to tax waste. Depending on an employee’s income bracket, they could be losing anywhere from 30% to 40% of the car allowance to income taxes and FICA/Medicare.
For a $500/month allowance, that could leave the employee with only somewhere between $350 and $300 – that’s it. Plus, the company incurs additional expense in the form of their share of payroll taxes on each allowance.
Expenses increase, but the car allowance stays flat.
Over time, travel expenses 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.
Both the 2017 and 2018 mBurse car allowance surveys revealed that around three quarters of businesses go 10 years or more without changing their allowance amount. Over a decade, inflation by itself can reduce the value of a car allowance drastically. In 2019, a $500 allowance is worth only $420 in 2009 dollars.
Cost inequalities make unfair car allowances.
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.
Is it fair for two employees to receive the same amount if one covers small territory in Alabama, and the other covers a large territory in California? Inequality is a huge de-motivator and can lead to significant productivity losses and attrition.
The car allowance snowball effect
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.
Ways to promote productivity and growth with your car allowance
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. A fair car allowance helps them to feel comfortable traveling to meet current and potential customers and moving between your locations.
A fair allowance that keeps up with expenses builds that trust and protects each 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.
Here's how to make your company car allowance a trust builder and productivity promoter:
Benchmark your car allowance annually or bi-annually.
Costs change, and so do territory sizes. You need to check regularly to see whether your current allowance plan fits employees' actual expense needs. It's unacceptable and irresponsible to leave a vehicle allowance plan unreviewed for years on end.
Re-evaluating your car allowance policy every year or two shows respect to employees and a commitment to protecting them. to ensure it is keeping up with all employees’ costs
Calculate the company car allowance based on drivers' expense needs.
Evaluate each employee’s actual needs, and provide an allowance based on their costs as well as their driving territory sizes. The company should be covering everything from gas costs to vehicle depreciation to insurance to maintenance, oil, and tires.
If there is a wide disparity in miles driven or you have drivers in expensive regions, consider segmenting the allowance so that different groups of employees receive different amounts.
Switch to a non-taxable vehicle reimbursement.
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.
While many companies look to the IRS business mileage rate for non-taxable reimbursements, there's actually a much better approach. The fixed and variable rate car allowance, also known as a FAVR vehicle program, provides the most accurate and equitable approach to tax-free vehicle reimbursement.
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.