As 2020 begins, it's time to review your company vehicle reimbursement program and make sure that your rate is fair, competitive, and cost-effective. Recent changes in the tax code and state labor codes necessitate reviewing your car allowance or mileage rate, even if you typically base yours on the IRS standard mileage rate.
How to set your car allowance or mileage rate in 2020
To help businesses ensure they pay a fair, competitive, and cost-effective vehicle reimbursement, we have created a set of three rate-development tools, all free of charge. This post will focus on the third tool: a questionnaire that helps to generate the optimal rate or rates for your company in 2020.
Here's a review of the first two steps of the process if you have not already completed them:
Step 1: Grade your car allowance or reimbursement
Using our tool called The Car Allowance Grader, you answer a set of questions about your current vehicle reimbursement program and receive a report that allows you to self-assess, identifying strengths, weaknesses, and opportunities for growth. For more information, read What Grade Would You Give Your Company Car Allowance?
Step 2: Compare your program to other companies'
Our second tool, Benchmarking Analysis, allows you to compare your organization's vehicle reimbursement policies with those of three competitors and three similarly-sized organizations. You answer a few questions, and within three business days you receive a report we've prepared, free of charge. For more information, read Will Your Vehicle Allowance Be Competitive in 2020?
Step 3: Optimize your car allowance or mileage rate
As with step 2, you answer a few questions (it literally takes 30 seconds – we timed it), and we use our proprietary data to identify a rate that best fits your company's goals and your drivers' expense needs. Select the image below if you're ready to begin, or keep reading to learn more about how to develop a competitive rate for 2020.
3 must-haves for a 2020 car allowance or mileage rate
Most U.S. employers with workers who drive personal vehicles set a monthly car allowance amount and leave it unchanged for years. Or they just pay whatever mileage rate the IRS sets as its Safe Harbor Rate for that year (57.5 cents per mile in 2020). Neither of these approaches, however, ensures a fair, competitive, or cost-effective rate. Let's explore each of these must-have qualities.
1. A fair car allowance or mileage rate for 2020
Neither a standard car allowance nor a standard mileage rate, such as the IRS rate, will generate fair payments for vehicle expenses. This is because different drivers working different sized territories in different regions will incur vehicle costs at different rates. There's no way around it.
If you're paying the IRS mileage rate, your low-mileage drivers may be under-reimbursed, and your high-mileage drivers may be over-reimbursed. And if you're paying a standard car allowance, chances are that your employees are mostly being under-reimbursed.
Congress's removal of the tax deduction for business mileage for tax years 2018-2025 dealt a blow to mobile workers, especially those who receive a taxable car allowance. They were already losing 30 - 40% of their allowance to tax withholding. Is it fair to keep paying them the same amount?
The solution is to find out what range of vehicle expenses your employees are actually incurring and to adjust your allowance or mileage rate. Be open to paying different amounts or rates based on whether an employee works in a larger or more expensive region.
2. A competitive car allowance or mileage rate for 2020
Given the changes in the tax code, organizations that responded by boosting their vehicle reimbursement have given themselves a competitive advantage heading into 2020. Our annual survey found that the majority of mobile employees are unhappy with their current car allowance and have lost income because of the tax reform.
Businesses that adjusted are more likely to retain these employees. They also stand to gain top talent from other organizations that did not adjust. Paying the IRS business mileage rate is not sufficient to stay competitive. Low- and mid-mileage drivers often claimed unreimbursed business expenses on their taxes under the old law but now cannot. They may look for an employer with a different reimbursement model.
The solution is, again, to evaluate whether your current policy actually meets the vehicle expense needs of your employees and then to calculate your new rate based on those expenses. The mBurse rate development process can identify an ideal rate for any driver based on an appropriate vehicle, a garage zip code, and a monthly mileage amount.
3. A cost-effective car allowance or mileage rate for 2020
If you suspect that you need to boost your current vehicle payment plan in order to be fair and competitive, you're probably wondering about cost control. This is an important concern, and there are ways to control costs with a properly optimized vehicle reimbursement program.
Cost control almost always proves a problem for organizations paying the IRS mileage rate (or any mileage rate for that matter) because it's easy for employees to boost their earnings by either driving more miles or reporting more mileage. Using an accurate mileage tracking system combined with an optimized rate is crucial to keeping the reimbursement policy feasible.
For organizations paying a taxable car allowance, taxation itself and the threat of labor code violations add up. There's payroll taxes for one thing, but then there's also the threat of fines and lawsuits in states like California, Massachusetts, and now Illinois, where standard car allowances often are not sufficient to comply with strict labor codes.
Once again, the solution is to pay a rate that fits your employees' expenses and does not run the risk of over-reimbursing. Depending on where they work and how many miles they drive per month, that amount could vary, which is why you may need more than one rate in order to optimize.
How to choose your 2020 allowance amount or vehicle rate
If you're not ready to request your free rate from mBurse and would like to educate yourself further, check out our ultimate guide to rate optimization: Four Steps to a 2020 Car Allowance or Mileage Reimbursement. In this guide we look at all the vehicle expenses your rate should cover, the specific vehicle expense data for major American cities, and how to use a standard vehicle to generate your optimal rate.
To obtain your free car allowance or reimbursement rate now, select the box below.