The travel and expense (T & E) category of an operations budget is one of the toughest to control. One easily overlooked subcategory is reimbursement for vehicle travel. Performing a review of this part of your budget can pay huge dividends.
A few years ago, a survey by Concur found that the two most difficult parts of a budget to control were maintenance + repairs and travel + expense. Operating a fleet of vehicles is a massive and unpredictable expense, especially in today's inflationary economy. But paying a car allowance or mileage reimbursement can also create numerous financial headaches, some of which you might not even be aware of.
The key component to a good budget for vehicle travel is data that can accurately reflect the expense needs of employees. We'll cover below how to obtain this kind of data and use it effectively. But first let's look at some of the budgetary pitfalls related to common approaches to paying for employees' vehicle travel expenses.
If your organization currently operates a fleet of company vehicles, your budgetary needs are best considered in separate posts on how to control the expenses of company cars and how to decide whether to stick with a fleet program or to switch to a reimbursement model.
When evaluating your budget for employee car allowances, the key factors to consider are a) tax waste and b) insufficient payments. Because car allowances are treated as part of an employee's salary and benefits package, they are often ignored when it comes to T&E budgeting. And because car allowances are distributed in an employee's paycheck, they are subject to tax withholding.
It is easy to calculate the expense of your company's car allowance by multiplying the monthly amount by the number of employees who receive the allowance. But have you ever calculated how much that tax withholding is costing your organization?
Taxes typically eat up around 30 to 40 percent of the car allowance amount for each employee. On top of federal and state income taxes, you have payroll taxes, to which the employer must also contribute. A $600/month allowance may be worth less than $400/month to an employee after taxes. The company pays 7.65% on top of that for FICA and Medicare taxes. That's $46 on top of the $600 each month.
If you have 50 employees receiving a car allowance, you're paying $32,300 per month, but only around $20,000 of that is actually going to employees after taxes. Can the amount employees receive actually cover their vehicle expenses? Expenses include not only fuel, oil, and tires but also insurance, depreciation, maintenance, and registration/license.
If employees' car allowances after taxes do not cover their expenses, a less visible cost arises due to productivity loss when employees drive less to cut costs, or hiring and onboarding costs when employees leave the company for better compensation.
If your organization pays a mileage reimbursement, the key budgetary questions are a) how much your employees should be driving and b) overpayments vs. underpayments. An additional issue related to mileage reporting arises as well.
You can set your budget based on past trends in employees' driving, which should be available through whatever method you use to record their mileage, whether that is a spreadsheet or a mileage tracking app. You then multiply the expected annual mileage by the company mileage rate. Many organizations use the IRS business mileage rate of 65.5 cents per mile for 2023.
But how do you know whether employees are driving the appropriate amount? And how do you know whether the mileage rate is accurately reimbursing their expenses?
Because a mileage reimbursement incentivizes miles driven, employees may drive more than is necessary in order to boost their reimbursement. This especially can prove true when employees experience higher than usual vehicle expenses, such as last spring and summer when gas prices spiked. Paying the IRS rate or lower avoids tax waste, but if employees drive or report more than necessary, 65.5 cents per mile becomes an uncontrollable cost.
Mileage rates are notorious for both overpaying high-mileage drivers and underpaying low-mileage drivers. As far as the budget goes, it can be tempting to ignore this problem, since the discrepancy may balance itself out. But is it worth the cost of replacing employees who leave due to insufficient reimbursement, or the cost of employees who drive unnecessary miles in order to boost an insufficient reimbursement?
The method of logging and reporting mileage also plays a role in your bottom line. Many organizations still use some form of manual mileage reporting, whether that's a spreadsheet or an expense system into which employees record their monthly mileage.
Given that mileage reimbursements incentivize increasing mileage amounts, it makes sense that some drivers will drive extra miles, overestimate mileage, or even record higher amounts than they actually drove. Unless you use a transparent and accurate mileage tracking system, it can be nearly impossible to determine whether your budget is being strained by this added cost.
If you have visibility into each employee's trips and productivity, then you can determine whether the amount of mileage they are reporting for each trip matches a reasonable and efficient amount. This is why we recommend a mobile app that captures mileage in real-time while also protecting employee privacy. Adding visibility to your mileage capture can help rein in inflated costs due to overreporting.
The key to budgeting for employee vehicle travel is to base the budget on data that can predict how much it will cost for employees to use their vehicles to carry out their jobs.
When generating this data, it is crucial to base expense predictions on a single vehicle suitable to the employees' job, not on the actual vehicles they drive. An employee may choose to drive an SUV with poor fuel mileage, but they should be reimbursed based on the expense data for the appropriate standard vehicle.
By using an appropriate vehicle to derive cost data, you can, with sufficient time and effort calculate the reasonable range of costs for employees based on how much they drive and where they live. You can then budget likewise.
Of course, the more employees you have in more widespread locations, the more complicated it can get. Different people cover different sized territories and some might work in more expensive places than others.
You can also outsource the data-gathering and even the reimbursement. Contact mBurse to learn about data you can get access to or to learn about our fixed and variable rate (FAVR) plans that reimburse tax-free using data based on a standard vehicle.
Read Part 2 of this post: How to Maintain Your Vehicle Reimbursement Operating Budget