As our 2019 Car Allowance Survey revealed, tax reform took a toll on employees who drive a personal vehicle for work. Their dissatisfaction during last year's tax season placed pressure on employers to change their approach to car allowances. With the COVID-19 pandemic adding new pressures, here's our updated guide to auditing your company car allowance policy.
How to audit your 2021 car allowance policy
mBurse has created a three-step process for evaluating and updating business vehicle policies. Following these steps will enable you to stay responsive and competitive in the changing environment. It will help you customize your car allowance for changing employee needs while cutting expenses at the same time.
Step 1: Assess your current car allowance policy
Use our Car Allowance Grader to audit your current company policy. You answer a set of questions, and our algorithms provide an automated report to help you diagnose shortcomings, target areas for growth, reduce costs, and increase employee satisfaction. (More details below.)
Step 2: Compare your car allowance policy with other companies' policies
Based on the results of the policy audit, mBurse will prepare a benchmarking analysis. This report affords the opportunity to compare the company's policy with those of competitors and similarly-sized organizations in other industries. For more details, read Is Your Vehicle Allowance Enough?
Step 3: Discover a customized car allowance that can save money
After the audit and benchmarking report, you may request from mBurse a customizable car allowance or reimbursement rate that balances your organization's goals with its employees' vehicle expense needs. You answer a few additional questions, and we provide this rate free of charge. For more details, read 2021 Car Allowance Policy: How to Set the Proper Amount.
How we calculate a car allowance policy grade
Our self-auditing tool, the Car Allowance Grader, asks the following types of questions:
- What type of vehicle reimbursement your organization offers (e.g. monthly car allowance, mileage reimbursement, fuel reimbursement, mileage allowance, etc.)
- The current rate your organization pays (e.g. $500/month, $.56/mile, etc.)
- The the number of employees who receive the vehicle reimbursement
- Whether your organization operates in certain states with strict labor codes
- Your current practices regarding employee auto insurance verification and motor vehicle record checks
3 criteria to calculate a car allowance for 2021
A car allowance audit should be judged according to three important criteria: cost-effectiveness, company risk, and competitiveness. Our reports include three sections that correspond with these three criteria.
1. Taxation costs of non-accountable car allowance plans
Because the IRS treats a car allowance as taxable income, employees receive 30-40% less than their stated car allowance amount. FICA also adds to the employer's expense. Using a given monthly amount, the Car Allowance Grader calculates the average take-home amount employees likely receive as well as the overall amount the company actually pays on each car allowance.
Using these calculations, you can discover how much money your company could save by switching to a non-taxable reimbursement. If your company already has a non-taxable vehicle plan, you can also discover whether that plan creates its own cost control issues.
2. Risk due to employee vehicle use
The risks of car accidents and labor code violations add hidden costs to most car allowance policies. The three categories to examine during a policy audit are general liability, negligent entrustment, and labor code compliance.
General liability refers to whether an employee's auto insurance coverage is sufficient to cover an accident they cause while on the job. If not, their employer could end up footing the bill.
Negligent entrustment refers to situations in which an employer is held responsible for an employee's costly actions. If the employer does not take proactive, documented steps to ensure that all drivers belong on the road, a lawsuit can name the employer as a defendant on the basis of negligence.
Labor code violations related to vehicle reimbursements are a threat in employer-friendly states that prohibit employers from passing on business expenses to employees. Vehicle expenses fall under this category, so it is important to know whether your employees operate in these states and whether your current policy complies with the law.
3. How long it's been since you last increased your car allowance amount
If a car allowance policy does not keep up with market changes, that policy will compromise attraction and retention of productive employees. Our annual survey consistently reveals that most organizations go years, often decades, without making changes to their policy.
With the loss of the tax deduction for unreimbursed business expenses, employees are increasingly reporting that their company's policy does not keep up with their vehicle expenses — 62%, according to our 2019 survey.
An insufficient vehicle allowance or reimbursement not only can increase attrition rates but also can decrease employee productivity as employees drive less to save money. An updated policy may sound costly, but it will likely increase retention of top talent, attract new employees, and boost productivity.
With more people working remotely due to COVID-19, reducing the car allowance may seem like a good way to cut costs, but that may not be in the company's best interest. (Learn why.)
Customizing your car allowance or reimbursement in 2021
Once you have audited your company's vehicle policy, it's important to take the necessary steps to customize your car allowance to the needs of the company and the employees and enjoy the savings that follow. To start the process, select the option below.