It pays to outsource the administration of your company car allowance policy. Here are the top ten reasons why.
For years, the corporate world has treated car allowances and other business vehicle policies in a simplistic manner. You pick a car allowance amount (often taken from a competitor) and pay it as part of the employee's paycheck. Or you just take the IRS standard business mileage rate and reimburse the employee's monthly mileage at that rate.
In other words, organizations typically take a "set it and forget it" approach to car allowance and vehicle reimbursement policies. However, a number of quietly costly problems result from this approach:
All of these problems can be either fully resolved or greatly mitigated through third-party vehicle policy administration. You don't manage your employees' health benefits – you let the experts do it. Why not approach your car allowance or reimbursement program the same way?
Here are our top ten reasons to contract out the management of your company's car allowance or business reimbursement policy:
There are two ways to deliver a car allowance or reimbursement that accurately and fairly pays employees for the business use of their vehicle. You can either have employees keep track of receipts, or you can use vehicle expense data that accurately predicts employees' vehicle expenses. Obtaining data specific to each employee's zip code is time-consuming, but organizations exist that maintain databases for this purpose.
Any taxable car allowance is a huge waste of money. Often around 40% of that allowance amount goes to taxes. The simplest non-taxable plan is to pay the IRS business mileage rate as a reimbursement. However, this method is guaranteed to under-reimburse some drivers and over-reimburse others. The most accurate and equitable plan is a fixed and variable rate car allowance (also known as FAVR reimbursement). This method, however, is difficult to administer on your own.
Switching from a taxable car allowance to a FAVR car allowance administered by a third-party typically proves cost-effective. The money going to taxes is redirected into a more valuable benefit to employees and savings to the employer – even after program administration fees. Similarly, switching from the IRS rate to FAVR can reduce over-reimbursements while helping retain employees who were previously under-reimbursed.
Gas prices, insurance rates, and maintenance costs all vary geographically. Different employees drive significantly different amounts. A standard car allowance thus pays an equal amount to cover unequal expenses. A mileage reimbursement only partially fixes the problem because large differences in miles driven result in inequalities between drivers. Delivering equitable payments requires customizing rates by location. But obtaining the necessary data and calculating the rates is best left to a specialist.
The most accurate and fair way to reimburse employee vehicle costs is to derive reimbursement rates and allowances from a standard vehicle selected by the company. The employer avoids paying for the choices of some employees to drive gas guzzling vehicles. Standardizing the vehicle used to derive rates also makes it easier for the organization to customize payments for location-based and distance-based expense differences.
Third-party program administrators specialize in keeping track of different states' labor laws. Not only do you get a quantifiable and defensible allowance or reimbursement, but you also get the services of an organization that stays vigilant on your behalf to ensure compliance with labor codes like California's Labor Code, Section 2802.
It is crucial to verify biannually that employees carry sufficient auto insurance to prevent company liability in the event of a work-related accident. It is also crucial to regularly conduct motor vehicle record checks in order to ensure driver safety and to mitigate the risk of respondeat superior and negligent entrustment suits. Both of these processes take time and can be most efficiently carried out by a program administrator.
Crafting a robust vehicle allowance policy that protects the company from risks while treating employees fairly takes expert knowledge. The policy needs to be updated regularly, something many organizations neglect or even avoid due to its time consuming nature. Outsourcing this responsibility can help your organization stay on mission and ensure that its business vehicle policies fit organizational goals while staying competitive.
Mobile apps now exist that integrate with existing company expense systems and CRM software. These apps can track mileage, provide helpful business insights, and automate the car allowance or reimbursement payment process. In today's marketplace, employees are more and more used to administrative tasks being automated, and the business vehicle policy requirements should be no exception.
The disruptions of the past few years – a pandemic, supply chain disruptions, fuel cost volatility, and rampant inflation – demonstrate the need for policies that can handle rapidly changing circumstances. A car allowance policy should be able to address spikes in fuel prices, increases in vehicle prices, and shifts between limited and unlimited travel. A well-administered FAVR vehicle program is highly flexible no matter an organization's size and regularly adjusts rates.
In an increasingly complex environment for business vehicle travel, you want experts to handle your car allowance or reimbursement program administration. Letting someone else do all the work pays for itself in the long run in tax savings, reduced liabilities, equitable treatment of employees, and eliminated administrative hours.
To learn more about how FAVR vehicle program administration could work for your organization, either read our guide to FAVR or try our FAVR comparison calculator (see button below). Or just schedule a call with mBurse.