Many organizations have employees who operate vehicles for business purposes. Some issue company vehicles while others reimburse the use of personal vehicles or pay a car allowance. What happens when your organization decides to change its company vehicle or reimbursement program? Here's your guide.
If your employees drive as part of their jobs, what does your organization do to pay for the business use of the vehicles? These employees do deliveries, visit clients, make sales calls, and more. And they expect to be able to carry out those responsibilities without footing any of the cost.
Whether you provide a company vehicle, pay a car allowance, or reimburse mileage, there may come a time when your organization needs to make a change. Company vehicle programs are notoriously expensive. The cost of taxes on a car allowance can make it difficult to pay a competitive amount without breaking the bank. And mileage reimbursements can get costly as employees drive more and as vehicle costs increase over time.
The question is, how do you implement a shift in your business vehicle policies in a way that promotes employee satisfaction? Often these changes are motivated by the organization seeking a more financially sustainable option, which can leave the impression that the company is seeking to decrease costs at the expense of its employees.
In many cases, hiring a third-party organization to administer your program can resolve the challenges with change management. There are some key things to look for in a vendor who will partner with your organization.
Let's explore different scenarios in which your organization might decide to make a change and how hiring a business vehicle program vendor could help.
While there are many different kinds of vehicle programs that you might decide to shift away from, we will focus on the three most popular forms: company vehicle, car allowance, and mileage reimbursement.
Supplying a company car is often the most expensive option, leading some organizations to transition some or all of their employees out of the program. It is also very popular with employees because it is such a generous perk. This makes transitioning away from offering a company vehicle a difficult sell.
That is why hiring an expert to develop, implement, and administer the new program can be well worth it. Professionals with experience conducting these kinds of transitions can equip management to address employee concerns while rolling out a program that makes sense to employees and keeps their financial interests in mind.
If your organization currently offers a company vehicle but is considering making a transition, read Everything You Need to Know about Transitioning from a Company Car to a Reimbursement Program. This guide offers detailed information about your options and what your approach to change management should be.
The reasons many organizations have shifted away from car allowances in recent years are two-fold.
First, standard monthly car allowances are treated by the IRS as taxable income. This is because no accounting procedures are necessary to prove the business use of the expenditure. Over time, however, taxes eat up so much of an employee's take-home amount that their allowance cannot keep up. It is not unusual for taxes to total 30-40% of the allowance amount.
Second, a standard car allowance can get very expensive if you want to ensure that all employees are sufficiently compensated for the business use of their vehicle. Not only does tax waste mean that you have to set the allowance amount higher than the actual expense needs of employees, but you also have some employees with much higher expenses than others. Covering those employees will mean overpaying other employees, which is neither equitable nor feasible in many cases.
The key is to choose a non-taxable reimbursement plan. Often, the elimination of taxation allows the organization to feed that extra money back into employee benefits while reducing the overall costs of the vehicle program. The challenge is that all non-taxable plans require some kind of accounting procedure to prove business use. This is where a third-party program administer can be very helpful.
Reimbursing employees using a cents-per-mile rate like the IRS business rate is typically a non-taxable form of reimbursement, making it attractive to some businesses seeking to get away from the challenges related to car allowances and the high costs of a company car.
Some organizations, however, can find that a standard mileage rate is not a good fit. Common problems can be
Mileage rates tend to work best for organizations with employees who work in areas with similar costs and who drive similar amounts. Say one company has an employee who drives many miles covering a large territory in an inexpensive region and another employee driving less in a small but very expensive territory. That first employee may be over-reimbursed while that second employee is under-reimbursed.
In such a situation, it is clear that a different reimbursement method is needed in order to equalize things between those two employees. But the math can get complicated, and if the organization has a lot of employees working in a variety of circumstances, it can be too complex to handle in house. Once again, hiring an expert in vehicle reimbursement can be very helpful in order to transition to a more equitable and sustainable model.
Whatever the organization's situation, the same basic principles should guide both the decision making and change management process.
An expert vehicle program administrator will adhere to these principles and be able to guide your organization in implementing them smoothly. Learn more about the options mBurse offers by scheduling a phone call.