3 Steps to Calculate Your 2023 Car Allowance or Mileage Rate

Written by mBurse Team Member   |   Oct 24, 2022 7:00:00 AM

With mobile employees facing historically high vehicle-related costs, now is the time to re-calculate your car allowance vehicle reimbursement.

How much car allowance or vehicle reimbursement is right for 2023?

Heading into 2023, a number of factors are pressuring employers to provide more robust car allowances and vehicle reimbursements. First would be the high costs associated with vehicle ownership and use. While gas prices have subsided somewhat from their peak in the summer of 2022, they remain historically high. The prices of new and used vehicles remain at record highs. Auto insurance rates are also increasing, projected to rise by around 5% in 2023, according to Kelly Blue Book.

Calculate your 2023 car allowance - for free

Then 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. Until 2026 that deduction is off the table.  

There are other important factors to consider as well. As you prepare to tune up your vehicle allowance or reimbursement for 2023, keep in mind the following pressure points.

1. Cost control will be a challenge for 2023 car allowance and reimbursement rates

With the inflationary costs of vehicle ownership and travel, employees will need a car allowance or mileage rate that can sufficiently keep up with their costs. The IRS recognized the need for responsiveness when it made the rare move of increasing mid-year the standard business mileage rate to 62.5 cents per gallon. But there are costs intrinsic to both allowances and mileage rates that must be addressed no matter what rate you pay:

The added cost of a taxable car allowance

Paying a 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 discrepancies, since different employees incur different levels of expense based on location and mileage. The cost of a taxable car allowance also includes the company's payroll taxes. Often, by switching to a tax-free reimbursement program, an employer can 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 continual increases in vehicle costs, many employees could feel justified in padding their reported mileage. This is not a good long-term situation, however, because there's no obvious limit to the expansion of unproductive mileage. 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

2. State labor laws will impact 2023 employee car allowances and business reimbursements

Employee-friendly states have tightened up labor codes to give added protection from unreimbursed business expenses. In 2019 Illinois amended its labor laws to include 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. 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.

Labor Codes

3. California employees will need a precisely calculated car allowance or mileage rate in 2023

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, California's extremely high gas prices (around $2/gallon above the national average) are increasingly rendering the IRS mileage rate insufficient, especially for low-mileage and average-mileage drivers.

Organizations with employees based in California should pay special attention to these employees' vehicle expense needs. 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 some 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. (For a quick California risk audit, follow this link.)

4. Attrition rates will impact 2023 car allowances and vehicle reimbursements

To stay competitive in 2023, it will be crucial that your organization tune up your car allowance or vehicle reimbursement. If your company business vehicle plan does not keep up with employees' costs, they will look for an employer that is more committed to protecting their income.

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.

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3 steps to calculate a fair, flexible 2023 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 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 2023.

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.

3 steps

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