In 2024 take advantage of opportunities to offer a competitive car allowance and provide certainty for valued employees. After two years of rapid inflation, predictability of business reimbursements is key.
Calculating Your Car Allowance or Mileage Rate for 2024
As you calculate your company car allowance or mileage rate for 2024, keep in mind the following three pressure points for employees who drive personal vehicles for work:
1. No tax deductions for business mileage and expenses
Employees still cannot deduct business mileage and expenses from their taxes. The Tax Cuts and Jobs Act of 2017 eliminated this popular tax write off for the tax years 2018-2025. Many employers have adjusted, but it is easy to forget this pressure point. Because standard car allowances are taxable, as much as 30-40% of the payment goes to the IRS, and employees have no way to recoup that part of the allowance via writing off mileage.
Employers looking to make their allowance more competitive without spending more could look into a non-taxable policy. Eliminating tax withholding would allow reinvestment of money that was going to the IRS back into the organization and its employees.
2. Costs of inflation, vehicle prices, and gas prices
It is no secret that inflation is increasing at its highest rate in decades. For mobile employees, the business cost increases are steep. The prices of new and used vehicles have increased sharply due to supply chain issues and increased demand for used vehicles. With the United Auto Workers strike ongoing, consumers could see prices rise again as shortages affect the market heading into 2024.
Gas prices continue to run high, with prices remaining near $4/gallon in many states, and California drivers paying close to $6/gallon. According to the Consumer Price Index, auto insurance rates increased by 19% from August 2022 to August 2023. And the costs of maintenance and repair rose by 12% in the same time period. Car allowances must take into account these cost increases.
3. Inequitable payments to mobile workers
It is in the nature of a typical car allowance policy to generate inequitable payments. If all mobile workers are paid the same allowance amount, this can lead to discrepancies that create ill will. Low-mileage employees living in inexpensive areas may profit from the allowance. High-mileage employees may experience vehicle costs that exceed the allowance.
These kinds of discrepancies should factor into how you approach setting a 2024 company car allowance policy. Your organization may need to consider a plan that accounts for a range of expense needs, rather than paying a standard amount to every single employee.
Evaluating your current car allowance policy
If you own or manage a business that pays a car allowance, you need to consider how to address the current pressure points for employees. If employees feel that their car allowance does not measure up to what they need, they may take measures to shore up their finances in other ways. These measures could include the following:
- Labor code complaints and lawsuits – Illinois and California labor laws require full reimbursement of employees; seven other states have similar laws to protect employee rights.
- Loss of productivity compared to costs – Employees who receive a flat allowance may drive less to save money, which can cause sales and client relations to suffer.
- Increased attrition – Employees whose companies do not meet their vehicle expense needs will leave for employers who fully reimburse employee expenses.
It is key to evaluate whether your current car allowance policy could combine with the current economic pressure points and push employees toward one or more of these actions at the expense of the company.
How much car allowance should I pay?
Before trying to calculate a car allowance, keep in mind that most vehicle expenses do not directly depend on how much a person drives. This is why paying a mileage rate often under-reimburses low-mileage drivers and mid-mileage drivers who live in expensive areas.
Auto insurance and depreciation typically constitute around 60% of annual vehicle expenses for most American drivers. These two sources of expense are minimally affected by how much a person drives.
Other non-operational expenses include personal property taxes, vehicle registration and license fees, and any other taxes or fees that a locality might levy on the vehicle – these must all be paid whether the employee drives a lot or a little. Fuel, oil, tires, and maintenance are the costs most directly associated with actual operation of a vehicle.
With overall vehicle expenses increasing significantly over the past three years, many employees will be looking for a boost. Fortunately there is a way to save money on your company car allowance while still keeping the amount competitive. It's all about knowing the tax rules for car allowances.
Car allowance tax rules for 2024
Whether your employees' vehicle allowance is taxable can have a big impact on ways to save money while increasing your car allowance.
Standard taxable car allowances
If you pay a set monthly stipend to employees, that allowance is considered taxable compensation by the IRS. Your employees may lose 30 to 40% of their allowance to taxes, which increases the likelihood that, after taxes, their vehicle allowance amount simply cannot cover costs. To avoid taxation, you must substantiate the business use of payments for vehicle expenses.
Mileage allowance (a.k.a. mileage substantiation)
If your employees track their mileage in order to prove business use of their car allowance, then they don't have to pay taxes on their stipend amount, assuming it does not exceed the amount of their mileage multiplied by the IRS business rate (65.5 cents-per-mile for 2023). While this cap can rein in costs, it can also leave employees exposed to unreimbursed expenses.
There are other ways to avoid taxation, such as reimbursing directly with the IRS mileage rate or paying a fixed and variable rate allowance (FAVR). Both taxation of allowances and caps on monthly mileage amounts can produce a gap between take-home pay and vehicle expenses, which should be covered by your new 2024 rate.
And that's where your organization could find an opportunity to save money, provide a robust vehicle use benefit, and set itself up for growth in 2024.
Two ways to improve your 2024 car allowance
There are two changes to standard car allowance policies that can set up an organization for growth in 2024 and beyond while addressing the current pressure points employees face.
1. Choose a tax-free car allowance in 2024
Switching from a taxable car allowance to a non-taxable allowance will more than pay for itself. The tax dollars that no longer go to the government can be channeled into company savings and boosted employee benefits. The key is to figure out which non-taxable approach best fits your organization.
2. Calculate a more flexible car allowance in 2024
Drivers' expense needs can vary widely within one organization. Some drive more than others, and some live and work in more expensive locations than others. Calculating a competitive car allowance policy requires tailoring the allowance amount to the actual vehicle expense needs of employees. Different employees will need different amounts.
In order to determine which non-taxable policy is best to fit your organization's circumstances and goals and to learn how to tailor the policy to your employees' needs, you need a guide.
Choosing a flexible, tax-free car allowance policy
We have created a detailed exploration of the ins and outs of car allowances to help you navigate the current circumstances. In this guide you’ll discover
- What expenses a car allowance policy should cover
- Business vehicle expense reimbursement methods – monthly stipends (taxed), mileage allowances (non-taxed), mileage rates (non-taxed), and fixed and variable rate car allowances (non-taxed).
- The best method for your organization’s size and goals
- How to turn taxes into savings and growth
- Whether the IRS mileage rate is right for your company
- Labor code compliance (e.g. California Labor Code Section 2802(a))
- Addressing shortcomings of car allowances and mileage rates
- How the Tax Cuts and Jobs Act affects vehicle reimbursements
Equipping yourself to calculate your allowance amount based on the actual needs of your employees will pay dividends. This way you can retain good employees while controlling costs.
Take the time to educate yourself now so that you can treat your employees equitably in the coming years.
Or, to take action now, try our self-guided process of developing a competitive, transparent, and cost-effective policy. We'll even provide you with a suggested rate optimized for your organization for free.