In times of high gas prices, organizations that pay a car allowance feel pressure to provide employees with a gas card or fuel reimbursement. However, there are more cost-effective ways to protect employees' income from spikes in fuel costs.
Gas prices in the U.S. recently hit an all-time high and remain above $4 per gallon in many places across the country ($6/gal in California!). We explored the reasons in a previous post. This post evaluates the cost-effectiveness of paying directly for employees' fuel in comparison to alternative approaches.
Rapid increases in gas prices can leave employees who receive car allowances undercompensated. The same is true of employees who receive a mileage reimbursement rate. While each employee's costs-per-mile to carry out work responsibilities just increased, their monthly stipend or cents-per-mile rate did not increase. Our inflationary economy is pressuring American workers in many other areas of expense as well.
Giving employees a gas card is generous and convenient. It’s also foolish. You may quiet complaints and demonstrate a desire to treat employees equitably. But rather than solving the true problem – the car allowance or mileage rate itself – you create a new set of problems.
Fundamentally, a gas card limits your ability to control costs. Let's look at three contributing factors that illustrate this problem.
An employee’s choice in personal vehicle lies outside your control. If an employee chooses to drive a large pickup or SUV, you will be subsidizing their fuel costs. A gas card removes any incentive for the employee to use a fuel-efficient vehicle for work purposes. This exposes your bottom line to expenses that contribute nothing to your organization’s mission.
When an employee drives a personal vehicle for company purposes, it becomes difficult to separate business use from personal use. Say an employee runs a quick errand between stops, or picks up the kids from school after work, or takes a weekend trip using the remnants of gas purchased with the fuel card. And, yes, gas cards are taxable unless you can prove business use of each purchase.
Employees control the fuel card and your costs based on how they report business use vs. personal use. Because a lot of companies rely on the honor system, business use may be over-reported. You can regain some control by placing limits on daily, weekly, or monthly transactions. However, such limits still leave two problems: employees with high fuel costs may remain under-reimbursed and employees with lower fuel costs may spend up to the maximum by over-reporting business use.
If you currently provide a standard car allowance, adding a gas card or fuel reimbursement will require also adding a mileage tracker to substantiate business use. You suddenly will have a complicated vehicle reimbursement policy instead of the simple monthly allowance. How do you support employees in a cost-effective way?
Around 40% of a standard car allowance goes to federal and state taxes. Switching to a non-taxable plan recoups that money and reinvests it in the company's workers.
Don't non-taxable plans involve administrative complexities in order to meet IRS rules? Yes, but you are already looking at increased administrative complexity with the addition of a gas card. A non-taxable allowance will boost your employees' pay while reining in overall costs.
All mileage reimbursement rates up to and equal to the IRS standard business rate are considered non-taxable. These rates, however, do not adjust in accordance with rising and falling gas prices. Unless the IRS makes the rare decision to adjust its 2022 rate in the middle of the year, your employees will receive a rate that was calculated in December of 2021, before the current spike in prices.
The proper way to adopt a non-taxable AND adjustable rate is to adopt a fixed and variable rate car allowance. This approach pays a fixed monthly amount for employees' fixed costs (like insurance and depreciation) and an adjustable mileage rate for employees' variable costs (like gas, oil, and maintenance).
Also known as a FAVR reimbursement plan, this approach is the most cost-effective alternative to both a car allowance plus gas card and to a standard mileage rate.
Whatever approach you take, your employees need to use a mileage tracker that reduces their ability to accidentally or deliberately over-report business mileage. The level of transparency needed here can create worries about privacy.
That's why we recommend mLog, a mobile app that provides visibility into business travel while protecting employees' privacy.
To learn more about these cost-effective strategies to combat high gas prices, schedule a call with mBurse. Or read our longer guide below.