With prices at the pump spiking, standard car allowances are being outstripped by driving expenses. Switching to a non-taxable car allowance could help employees while reining in high costs.
Your employees operate personal vehicles on behalf of the company and receive a car allowance in return. When gas prices rise rapidly, as they have in 2022, this puts significant financial pressure on employees. They will try to drive less, which means fewer face-to-face meetings with clients. Or they make look for work at an organization with better benefits.
Employers may choose to increase the car allowance in response, which seems only fair, especially if gas prices are expected to continue to say high. But what if there were a way to boost the allowance without adding significant expense to the company?
There is: switching to a non-taxable car allowance.
Most organizations that pay a car allowance pay it as a taxable lump sum each month. They do not have to account for whether the money is spent on vehicle costs. It is a simple program that requires no administrative time and carries minimal obvious expense for the company. Other than the employer's portion of FICA/Medicare, there is no added up-front expense.
The longer-term costs are more subtle. These can range from decreased productivity when the allowance does not keep up with expenses, to labor code violations in states that require full reimbursement of expenses, to attrition costs when employees are dissatisfied with their compensation.
But the biggest problem with a taxable car allowance is its inefficient use of money. In many cases, around 40% of that monthly payment goes to taxes for the employee. So a $600/month allowance turns into a $360/month payment after federal and state taxes. What if that $240/month could be almost entirely invested in the employee and company instead?
With gas prices averaging over $4 a gallon and possibly hitting $5 soon, mobile employees are going to need some help with the increased expense. By eliminating tax waste, an employer can boost the monthly take-home pay without adding to overall expenses.
The optimal non-taxable plan is called a fixed and variable rate car allowance or FAVR vehicle plan. This vehicle allowance method is IRS-approved for businesses with at least five drivers. However, FAVR programs require specific vehicle expense data in order to generate varied rates specific to each employee's zip code location, so few employers are equipped to administer one on their own.
This administrative complexity is one of the main reasons many companies opt to just keep paying a taxable allowance. However, pressures like today's gas prices could be a sufficient impetus to explore this cost-effective option.
The answer is to outsource the FAVR car allowance to a third-party organization that specializes in affordably administering plans. Typically, the money that once went to taxes will, when redirected, be sufficient to not only boost employees' take home pay but also cover administrative fees.
It is important to know that switching to a non-taxable car allowance is only part of the reason to consider a fixed and variable rate plan. The longer-term reason would be to have a car allowance plan that allows payments to employees to rise and fall over time as vehicle costs rise and fall. The current gas price spike will not remain forever, and even after prices fall, history tells us that there will be future spikes. A FAVR program is designed to handle these fluctuations.
Similarly, because vehicle costs vary from state to state, a program like FAVR that generates rates that are zip-code specific can help resolve inequities in employee compensation. An employee working in California may be paying $6/gallon for gas, while an employee in Oklahoma may be paying under $4/gallon. Does it seem fair to pay them the same amount?
To learn more about FAVR use our savings calculator below or read our ultimate guide to FAVR vehicle programs. To learn about how third-party administration works, schedule a call today.