The 2019 tax-filing season exposed inadequate car allowances and vehicle reimbursements nationwide. This was the first time mobile employees could not write off unreimbursed business expenses. Now is the time to fix your vehicle reimbursement program in advance of the 2020 tax season.
How much car allowance or vehicle reimbursement is right for 2020?
Heading into 2020, a number of factors are pressuring employers to provide better car allowances and vehicle reimbursements. Foremost is the loss of the tax deduction for unreimbursed business expenses. Employees who receive car allowances used to deduct business mileage, which offset taxes they paid on their car allowance, as well as any gap between that allowance and their vehicle expense needs. Instead, in April of 2019 they found themselves thousands of dollars short.
Employees who receive a mileage reimbursement also were impacted by the new tax deduction rules. For low-mileage and average-mileage drivers in particular, the loss of the business expense deduction often amounted to a loss of income.
This new tax landscape raises the stakes for employers with mobile employees (those who drive personal vehicles to do their jobs). But it's not the only factor. As you prepare to tune up your vehicle allowance or reimbursement for 2020, keep in mind the following pressure points.
1. State labor codes will impact 2020 car allowance and vehicle reimbursements
Prior to the tax reform, a number of states already had labor laws designed to protect employees from their employer's business expenses. In the wake of the new tax code, employee-friendly states are tightening up labor codes to give added protection from unreimbursed business expenses.
Illinois is the latest state to amend its labor laws with an expense indemnification code. Many other states, including California, Massachusetts, Rhode Island, and the Dakotas, have similar protections written into their labor laws.
With increasing numbers of employees finding that their car allowance or mileage reimbursement is insufficient, we can also expect to see an increased number of lawsuits for labor code violations. An organization’s ability to reimburse properly while controlling costs will determine whether they avoid labor code infractions and lawsuits resulting from insufficient reimbursement.
2. California employees may require the highest car allowance or vehicle reimbursement in 2020
For many years California's strict labor law, known as CA Labor Code, Section 2802(a), has pushed employers to pay the IRS mileage rate instead of a traditional vehicle allowance. However, recent and planned increases in the California gas tax are increasingly rendering the IRS mileage rate insufficient, especially for low-mileage and average-mileage drivers.
Organizations with employees who are based in California should pay special attention to their employees' vehicle expense needs. In some parts of the state, drivers are paying more than $1 above the national average for gas prices, added to the already higher-than-average expenses for auto insurance, maintenance, and more.
It is simply not equitable to pay a California driver the same car allowance or mileage rate as a driver in a less expensive state such as South Carolina, yet many employers do just that. Don't be one of them. In fact, it is crucial that you develop an equitable reimbursement rate that pays different amounts to different employees, depending on their location and mileage.
3. Attrition rates will impact 2020 car allowances and vehicle reimbursements
Because many organizations have not yet responded to the changes in the tax code, employees are paying attention to those that have improved their employee vehicle reimbursement programs. To stay competitive in 2020, it will be crucial that your organization tune up your car allowance or vehicle reimbursement.
Consider the costs of increased employee attrition rates:
- the hiring process
- new employee onboarding and training
- the learning curve (time required to reach peak productivity)
- productivity lost due to an unfilled position
Take the time to review your company's attrition rates over the past two years. If you are seeing an uptick in 2019, there's a fair chance your car allowance or reimbursement is insufficient and a contributing factor.
4. Cost control will be a challenge for 2020 car allowance and reimbursement rates
The cost of an employee vehicle reimbursement program includes both the direct spend and the indirect costs of attrition, productivity losses, and labor code violations. While these last three costs derive primarily from insufficient reimbursements, there are two other types of costs that you need to take into consideration.
The added cost of a taxable car allowance
Paying a flat, taxable car allowance often leads to insufficient reimbursement of employees because their take-home amount is 30-40% less than what the company pays them. Paying the same amount to all employees can also lead to huge discrepancies, since different employees incur different amounts of vehicle expenses based on location and mileage.
But the cost of a taxable car allowance also includes the payroll taxes the company pays for each employee allowance. Often, by switching to a tax-free reimbursement program, an employer can boost inadequate employee vehicle allowances while reining in costs. It's simply a matter of leveraging the money going to federal and state taxes into savings for both the employee and the employer.
The added cost of an equal mileage reimbursement rate
When employers pay a mileage reimbursement rate, it incentivizes employees to drive (or report) extra mileage to boost their take-home pay. With the elimination of the unreimbursed business expense deduction and the increase of gas prices in California, many employees will feel fully justified in padding their reported mileage.
This is not a good long-term situation, however, because there's no obvious limit to the expansion of unproductive mileage. Paying an equal rate to different employees exacerbates the situation because it often leaves low-mileage drivers under-reimbursed and high-mileage drivers over-reimbursed.
3 steps to a fair, affordable 2020 car allowance or reimbursement rate
With the increased risk of labor code violations, employee turnover, and inability to control costs, now is the time to improve your policy. Accuracy and fairness must take priority. Your car allowance or reimbursement can no longer be treated as a simple cost; it has to be viewed as an investment in your most valuable resource: your employees.
To assist you, mBurse has created a new three-step process to improve any vehicle reimbursement plan for 2020.
Step 1: Self-audit
Grade your car allowance or reimbursement against best practices to identify areas of weakness and opportunities for growth. You answer a series of questions about your current policies, and we provide a diagnostic report to help you make informed decisions.
Step 2: Benchmarking report
Compare your current vehicle reimbursement program to the policies of your competitors as well as to the policies of similarly sized businesses in other industries. You answer four questions, and within two business days we provide you with a report tailored to your company.
Step 3: Get a free rate
Using our proprietary data on vehicle expenses, we give you a suggested car allowance amount or reimbursement rate that fits your organization's goals and expense needs. This free offer helps you to pinpoint the amounts different employees require for sufficient vehicle reimbursement.