Car allowances remain one of the most popular ways for employers to offset their employees' business vehicle expenses. However, few organizations take time to calculate a fair amount based on employees' typical costs. Here's how to remedy that.
What is a fair car allowance amount?
A fair car allowance amount should cover all of an employee's business-related costs associated with the ownership and operation of a vehicle used for work. The mBurse Car Allowance Survey found that 88% of mobile employees affirmed the importance of their car allowance covering all of their business-related vehicle expenses.
However, only 26% of the companies surveyed had based their car allowance amount on employee expense data (either actual or estimated). Most companies either based their car allowance amount on a competitor's amount, or did not know what the number was based on.
This discrepancy between employees' expectations and managements' compensation approach is a problem. It suggests that many workers are not being equitably reimbursed for their work-related car expenses.
Tools for calculating a fair car allowance
It can be pretty time consuming to calculate what each employee should receive as a car allowance. But there are tools to at least come up with fair estimates based on where employees work and how much they drive.
Every year, the IRS releases a standard business mileage rate based on average costs. For 2022, this rate is 62.5 cents per mile, after a 4-cent boost in July due to gas prices. This rate can give you a ballpark amount, but only if your employees actually experience average costs and drive around 14,000 annual miles. Undoubtedly different employees will drive different amounts, and some may work in particularly expensive parts of the country.
A better approach would be to try our allowance calculator, which will lead to the creation of a free recommended allowance or rate. (Hit the green button above.)
Or read on and use the individual tools below to help determine an appropriate car allowance amount that covers all work-related vehicle expenses.
1. Use the AAA gas map to calculate fuel costs for a car allowance
AAA Gas Prices has several useful tools to help you evaluate the sufficiency of your car allowance for particular parts of the country. The chief feature is the color-coded map of state average gas prices. This is important because different states experience very different gas prices.
Also helpful are the charts that compare current prices to past prices and the price trend calculator. These tools can help identify the range of prices that mobile employees are likely to experience over time.
Once you have a sense of the average gas prices in each region, you can create categories of different employees based on how much or how little driving they do. It is fair to use a standard vehicle appropriate for the job to estimate fuel costs based on that vehicle's fuel efficiency and avoid calculating the actual costs of a wide variety of employee vehicles.
2. Use RepairPal to project maintenance costs
Because employees are driving their personal vehicles a lot more than they would otherwise, it is appropriate for the company to cover their maintenance costs. Using a standard vehicle of a certain age, you can generally predict the yearly maintenance costs for each band of miles driven. Divide it by 12, and you've got the monthly amount.
Repairpal.com captures the differences in what mechanics charge in different regions. The primary purpose of the site is to help consumers check a mechanic’s estimate against the reasonable range for a particular service or repair in that consumer’s location. But it can also be used to predict the costs of routine maintenance a mobile employee is likely to experience based on where they live.
For example, replacing brake pads for a Honda Accord will cost between $177 and $307 in Iowa, but between $216 and $357 in San Francisco. That’s a 16–22% difference that should be reflected in car allowance amounts paid by a national company.
3. Use Carinsurance.com to discover auto insurance rates
An employer should pay close attention to each employee's car insurance coverage. Failure to do so could leave the company liable in the case of an accident in which the employee's insurance cannot cover medical costs and property damage. It is vital to subsidize robust auto insurance coverage while the employees hazard their personal vehicle along with the company name.
Car insurance rates vary greatly by state. The Average Car Insurance Rates calculator at CarInsurance.com is a helpful tool designed to give consumers a reasonable sense of the car insurance rates in their area. You can also use it to get a sense of the car insurance rates your employees in different parts of the country are likely to experience.
If your company requires a certain minimum coverage (it should), make sure employees can afford the required coverage. You should require coverage of at least 100/300/50, but 250/500/100 is best practice to protect the company from liability in an employee-involved accident.
4. Don't forget to calculate depreciation, fees, etc.
The biggest expense of vehicle ownership is depreciation. By requiring employees to own and operate a personal vehicle for work, the company assumes an obligation to subsidize this cost as well. Whether you calculate the business portion by the percentage of business miles out of total miles or by the percentage of time used for business (i.e. 5/7 or, five out of seven days of the week), this business portion will comprise most of the vehicle depreciation.
Again, pick a standard vehicle of a maximum age appropriate to the job, and use a free depreciation calculator to get a sense of how much value that vehicle is losing per year when you add up all the yearly depreciation amounts within that maximum age and divide by the number of years. The business portion of this average annual depreciation amount should inform the car allowance amount.
It is also possible to find the average costs of vehicle registration, license, and taxes across the country and factor these in. (And don't forget oil and tires – these contribute to the business vehicle expenses as well!)
Calculating the taxes on a standard car allowance
If learning how to calculate a fair car allowance is starting to sound complicated, that's because it is complicated. And adding further to the complications is the issue of taxation.
The IRS treats a standard vehicle allowance as taxable income. Our 2019 survey found that 79% of respondents paid a taxable car allowance to their employees. That means most employers should be taking into account a 30-40% difference between what they pay in the allowance and what employees get to keep.
If your organization's monthly car allowance amount seems sufficient to cover all business vehicle expenses, think again. That 30-40% of federal and state taxes (depending on tax brackets) often leaves mobile employees under reimbursed for their vehicle use.
How to ensure a fair car allowance without spending hours calculating expenses
The least time consuming way to calculate a fair car allowance for employees is to gain access to existing collections of vehicle data that can tell you what a car allowance should be for a standard vehicle driven X number of miles in a specific part of the country.
Pairing access to this data with an accountable, non-taxable car allowance can save a lot of money for the company while also delivering a more equitable vehicle reimbursement.
Try our three-step, self-guided process to use our collection of vehicle data to optimize your car allowance. Or, if you are interested in third-party program administration, use the calculator below to see how much you could save with an mBurse-administered non-taxable plan.