Thinking of adding a fuel card to your company car allowance policy? Read this guide to the pitfalls of paying directly for fuel. Then learn a better solution.
Many organizations learn that providing a car allowance or auto stipend isn’t enough. After taxes, employees keep only 65-70% of the intended amount. As a result, their allowance cannot keep up with the rising costs of operating a vehicle for work.
Employees are vocal when their car allowance isn’t keeping pace with their out-of-pocket costs. The easiest way to address the car allowance is to increase the amount. However, increasing the amount will also increase the tax waste. Instead, an organization might choose to add a fuel card or fuel reimbursement.
Compensation that is intended to help offset the costs of operating a personal vehicle for business. The car allowance or stipend is taxed.
A fuel card is a company credit card used to fuel a work vehicle. A business may just use a Visa or Mastercard for fuel purchases. Or the business may contract with a gas card company like Flying J, WEX, or Circle K. This allows them to get a discount on employee purchases.
The fuel card requires a mileage log or mileage tracking to measure the business use of fuel so that the personal use can be appropriately charged back to the employee, not as a fringe.
It occurs when an employee pays for fuel and is reimbursed by their employer. The reimbursement requires fuel receipts and a mileage log to substantiate the business use of the fuel.
A direct gas reimbursement is not to be confused with a fuel reimbursement rate or mileage reimbursement rate. In that case, a business pays a certain amount per mile either to reimburse fuel costs or to reimburse a large array of vehicle costs.
The IRS creates a mileage rate every year to determine the maximum tax-free amount of vehicle use for business. This mileage rate includes fuel as part of the calculation. Businesses that use the IRS reimbursement rate do not reimburse gas separately. Businesses do not typically pay both a gas and mileage reimbursement.
Many businesses overlook the responsibilities that come with issuing a credit card to pay for gas. These fuel cards as well as fuel reimbursements have drawbacks when employers neglect the duties that come with them.
Accountability come with paying for fuel. The most significant challenges relate to personal vs. business use. It is difficult to regulate and track the personal amount of fuel consumed. This can lead to misuse and confusion regarding work-related travel vs. personal use.
There are two sides of the tax waste when you pay a car allowance and pay for fuel separately.
The fuel card – This fringe benefit is taxable when the employer allows the employee to fuel a personal vehicle for work.
The car allowance or stipend – This is considered taxable income, which results in tax liabilities for the employee (Federal, state, and FICA) and the employer (FICA).
Inequity will take two forms based on the employees' mileage and vehicle:
Mileage — Employees that drive a lot or have a large territory will receive more than other employees. The optics of inequity can lead to poor morale.
Vehicle — Employees who drive larger vehicles will receive a much bigger benefit. For example, a large SUV will garner a larger benefit than a Prius.
Inequities also apply to car allowances. If Ralph drives 450 miles a month and Cindy drives 2,500 and receives the same auto allowance, is that fair?
There is an inherent risk to providing employees with a fuel card or reimbursement. The business does not provide a fuel card for personal use. However, how do you determine that all the fuel paid for was used for business? Gas cards for business are easy to abuse without a robust fuel card management system.
Tracking usage and mileage is imperative for providing fuel cards or reimbursements to employees. Considerable oversight is needed to reduce misuse. An employer must take measures to comply with tax laws while ensuring employees are not misusing fuel.
For some organizations, providing a fuel card is an easy or temporary fix for fuel inflation or employee complaints. When it is time to institute a permanent solution, the fuel perk goes away. Paying for an employee's gas is a huge benefit. Removing or restricting the fuel card or reimbursement could create challenges for retaining top talent.
If you provide a gas card or gas reimbursement, it’s essential to create a clear policy. The policy should clearly define the guidelines for use, be easy to manage, and allow for easy audits.
Establish when a fuel can be used and when it cannot be used. Set limits on use. For example, an employee can use the card to gas up on Friday but cannot use it again until Wednesday without authorization.
A business may choose to place a cap on weekly fuel usage. This could take the form either of limits that are enforced after payment or via prepayment. In the first case, you do not reimburse above the cap or you chargeback for spending above the cap. In the latter case, you supply prepaid gas cards.
Using a mileage app will help establish the amount of business and personal use that will be dovetail with the receipts. Separate business and personal use with a mileage app that will help determine the business and personal use that will dovetail with
Spot check and regular audits for transactions, business, and overall mileage. Do you have easy visibility into use patterns that might help identify misuse? Using a mileage app to track the mileage driven automatically provides helpful visibility.
An organization should overcommunicate the personal use chargeback policy. Employees should know what counts as personal vs. business use. And they should know which uses will trigger a chargeback. Finally, they should know how they are to report their business mileage and how often management will check the amounts.
Employees – Employees should have access to electronic records of their fuel usage. They should be able to see their mileage, spending, and personal usage so they will adhere to the policy.
Managers —The admin dashboard should track fuel usage, identify trends, and ensure that fuel consumption and timing follow policy. Management should rely on this tool to carry out the chargeback policy.
If your organization offers a car allowance and pays for fuel as well, you face unique challenges. Before changing the fuel policy, start with the policy regarding the car allowance. We recommend replacing your policy if you don’t want to increase the current allowance amount. We will cover other options below that can rein in costs while covering employees' needs.
The policy should clearly define what the allowance covers. Employees often see their car allowance in terms of whether it covers their car payment. However, businesses should use a car allowance to cover the business portion of vehicle costs:
Notice that fuel may be one of the costs covered. This creates a conflict if your organization already pays for fuel directly or reimburses it. In fact, paying for fuel on top of a car allowance is not cost-efficient but expensive and wasteful.
Next, we recommend identifying whether you are paying the right car allowance amount. You could benchmark the allowance against employees’ local costs to ensure you are not providing too much or too little. Then, we recommend benchmarking your allowance against the industry or competitors.
Make sure your policy is transparent. Once you have defined what the allowance covers and have determined a fair amount, communicate the rationale clearly. Employees need to know what they are being reimbursed for. The rates should be statistically defensible. And you should have some methodology in place to treat all employees fairly.
If a policy evaluation seems daunting, or if paying a car allowance plus fuel gets too expensive, explore other options. These options could include mileage reimbursement or fixed and variable rate reimbursement.
mBurse can help. We offer several programs, most of which are tax-free, to address the shortcomings of car allowances. One vehicle reimbursement program can address all of the shortcomings of a flat taxable car allowance and a fuel reimbursement.
A fixed and variable rate plan (FAVR) can help cover a range of employee needs:
• Live in a high-cost area
• Live in a low-cost area
• Drive a lot of miles
• Don’t drive many miles
The program is flexible, applying even to employees who experience a combination of these factors.
A FAVR program addresses all employees using a standard reimbursement vehicle to generate the rates. The reimbursement vehicle is typically the optimal size vehicle for employees to complete the duties of their jobs. The reimbursement vehicle or standard vehicle is applied to each employee’s home zip code, and the rates are calculated from there.
Each employee receives two forms of payment:
A fixed and variable reimbursement addresses the needs of all employees, no matter where they live or how many miles they travel. The program is scalable and customizable based on your needs.
A FAVR reimbursement also provides a tax-free and transparent option for reimbursement. This solves the problems of both a car allowance and a fuel card. You save money by eliminating taxes. You also wrap the fuel reimbursement rate into the variable mileage rate. As gas prices rise and fall, that mileage rate also rises and falls.