The 2019 and 2020 tax-filing seasons exposed inadequate car allowances and vehicle reimbursements. These were the first two years mobile employees could not write off unreimbursed business expenses. Now, with a pandemic adding economic pressure, is the time to re-calculate your vehicle reimbursement.
How much car allowance or vehicle reimbursement is right for 2021?
Heading into 2021, a number of factors are pressuring employers to provide more adaptable car allowances and vehicle reimbursements. Foremost is the uncertainty caused by COVID-19. Additionally, there's the continued loss of the tax deduction for unreimbursed business expenses. Many employees used to deduct business mileage, which offset taxes they paid on their car allowance and any gap between that allowance and their vehicle expenses. In April of 2019 they found themselves thousands of dollars short.
Employees who receive a mileage reimbursement also were impacted by the new tax deduction rules. For low-mileage and average-mileage drivers in particular, the loss of the business expense deduction often amounted to a loss of income. Plus, with more drivers in the low-mileage category due to the pandemic, it is apparent that mileage rates such as the IRS rate are not able to provide fair reimbursements.
The current tax landscape combined with the effects of COVID-19 on business travel raises the stakes for employers with mobile employees (those who drive personal vehicles to do their jobs). But there are other important factors to consider. As you prepare to tune up your vehicle allowance or reimbursement for 2021, keep in mind the following pressure points.
1. State labor laws will impact 2021 employee car allowances and business reimbursements
Prior to the tax reform, a number of states already had labor laws designed to protect employees from their employer's business expenses. In the wake of the new tax code, employee-friendly states are tightening up labor codes to give added protection from unreimbursed business expenses.
Illinois is the latest state to amend its labor laws with an expense indemnification code. Many other states, including California, Massachusetts, Rhode Island, and the Dakotas, have similar protections written into their labor laws.
With increasing numbers of employees finding that their car allowance or mileage reimbursement is insufficient, we can also expect to see an increased number of lawsuits for labor code violations. Furthermore, with increased numbers of employees working partly or entirely from home, remote work reimbursements are required in these states with strict labor codes (i.e. for mobile phone, home internet, home office expenses, etc.)
An organization’s ability to reimburse employees properly while controlling costs will determine whether they avoid labor code infractions and lawsuits resulting from insufficient reimbursement.
2. California employees will need a precisely calculated car allowance or mileage rate in 2021
For many years California's strict labor law, known as CA Labor Code, Section 2802(a), has pushed employers to pay the IRS mileage rate instead of a traditional vehicle allowance. However, recent and planned increases in the California gas tax are increasingly rendering the IRS mileage rate insufficient, especially for low-mileage and average-mileage drivers.
With the COVID-19 pandemic reducing the amount of business travel for face-to-face meetings, more employees than before are falling into these lower-mileage categories. These employees in particular are vulnerable to insufficient reimbursements because their fixed vehicle costs have not decreased even as their ability to recoup these costs through reimbursable miles has decreased.
Organizations with employees based in California should pay special attention to these employees' vehicle expense needs. In some parts of the state, drivers pay more than $1 above the national average for gas.
It is not equitable to pay a California driver the same car allowance or mileage rate as a driver in a less expensive state such as South Carolina, yet many employers do just that. Instead, it is crucial that you develop an equitable reimbursement rate that pays different amounts to different employees, depending on their location and mileage.
3. Attrition rates will impact 2021 car allowances and vehicle reimbursements
Because many organizations have not yet responded to the changes in the tax code, employees are paying attention to those that have improved their employee vehicle reimbursement programs. To stay competitive in 2021, it will be crucial that your organization tune up your car allowance or vehicle reimbursement.
Consider the costs of increased employee attrition rates:
- the hiring process
- new employee onboarding and training
- the learning curve (time required to reach peak productivity)
- productivity lost due to an unfilled position
Take the time to review your company's attrition rates over the past two years. If you are seeing an uptick, there's a fair chance your car allowance or reimbursement is insufficient and a contributing factor.
4. Cost control will be a challenge for 2021 car allowance and reimbursement rates
While facing severe economic pressures from the pandemic, some organizations were able to cut costs because employees were driving less. With hopeful signs that 2021 will see a rebound in business travel and productivity, tighter budgets may eventually be pressed by increased expense needs from mobile employees.
On top of this, there are two important types of costs to consider no matter what your operating conditions are:
The added cost of a taxable car allowance
Paying a flat, taxable car allowance often leads to insufficient reimbursement of employees because their take-home amount is 30-40% less than what the company pays them. Paying the same amount to all employees can also lead to huge discrepancies, since different employees incur different amounts of vehicle expenses based on location and mileage.
The cost of a taxable car allowance also includes the payroll taxes the company pays on each employee allowance. Often, by switching to a tax-free reimbursement program, an employer can boost inadequate employee vehicle allowances while reducing costs. You simply divert the money going to taxes into savings for both the employee and the employer.
The added cost of a standard mileage reimbursement rate
A mileage reimbursement rate may incentivize employees to drive (or report) extra mileage to boost their take-home pay. With the elimination of the unreimbursed business expense deduction, the increase of gas prices in California, and the decrease in business trips, many employees could feel justified in padding their reported mileage for the trips they do go on.
This is not a good long-term situation, however, because there's no obvious limit to the expansion of unproductive mileage, especially as travel activity returns to normal. Paying an equal rate to different employees exacerbates the situation because it often continues to leave low-mileage drivers under-reimbursed while over-reimbursing high-mileage drivers.
3 steps to calculate a fair, flexible 2021 car allowance or mileage rate
With the increased risk of labor code violations, employee turnover, and inability to control costs, now is the time to improve your policy. Accuracy and fairness must take priority. Your car allowance or reimbursement can no longer be treated as a simple cost; it has to be viewed as an investment in your most valuable resource: your employees.
Because employees in different areas face different cost dynamics, and because the pandemic has created unpredictable conditions for travel, it is vital to pursue a policy that allows maximum flexibility to tailor car reimbursements to employees operating under variable conditions.
To assist you, mBurse has created a three-step process to re-calculate any vehicle reimbursement plan for 2021.
Step 1: Self-audit
Grade your car allowance or reimbursement against best practices to identify areas of weakness and opportunities for growth. You answer a series of questions about your current policies, and we provide a diagnostic report to help you make informed decisions.
Step 2: Benchmarking report
Compare your current vehicle reimbursement program to the policies of your competitors as well as to the policies of similarly sized businesses in other industries. You answer four questions, and within two business days we provide you with a report tailored to your company.
Step 3: Get a free rate, calculated just for you
Using our proprietary data on vehicle expenses, we calculate a suggested car allowance amount or reimbursement rate that fits your organization's goals and expense needs. This free offer helps you to pinpoint the amounts different employees require for sufficient vehicle reimbursement.