Due to the removal of popular deductions, for the second year in a row many taxpayers face reduced refunds or no refunds. The impact on your employees may affect your organization in surprising ways.
Will my tax refund be smaller this year?
So far this year, as people file their 2019 taxes, refunds are down slightly – by about $18 per tax return. That may not sound like much, but the early filers are often the people who receive the biggest refunds, so the gap between last year and this year could grow.
There was a larger drop in 2019 from the 2018 numbers, and this overall downward trend has a lot to do with the tax reform that went into effect in 2018.
This was the biggest tax reform in over 30 years. As part of the overhaul many organizations reduced the amount of federal taxes withheld from employees’ paychecks. Most people saw a slight increase in their paychecks, which in some cases then resulted in decreased refunds.
Why might my tax refund be smaller?
The three main causes of reduced tax refunds from 2018 to 2019 were
- Paycheck withholding changes
- Eliminated miscellaneous deductions
- Caps on state and local taxes
These factors are still in effect, especially because some employers did not immediately adjust withholding to fit the new tax code. Some workers didn't have their withholding adjusted until at some point in 2019.
But one of the biggest impacts of the tax reform has been on workers who used to rely on the miscellaneous deductions – especially the unreimbursed business expense deduction. If your business employs people who drive a personal vehicle for work and receive a taxable car allowance, you can expect that many of them saw significant decreases in their tax refunds. Prior to 2019, they probably were deducting business mileage, and now they can't.
How will smaller tax refunds impact businesses?
It is not readily apparent how decreased tax refunds can impact employers. Obviously, if a refund is only down by $18, that's not going to make a huge impact. But what if a business employs people who have seen much more significant decreases over the past two tax years?
These workers – especially those who relied on the unreimbursed expense deduction – have probably made and will continue to make choices to recoup lost income. And some of these choices could negatively impact the way they conduct their jobs.
If you have workers who drive personal vehicles, pay attention. These mobile employees could include a variety of roles: sales reps, merchandisers, account managers, delivery drivers, client relations managers, etc. Our 2019 Car Allowance Survey found that over 60% of mobile workers saw their net income decrease from 2018 to 2019. Around the same percentage of HR managers reported complaints from employees about their car allowance amounts.
The tax reform remains in place through 2025, so now is the time to understand these employees' reimbursement needs and protect your organization from the negative impacts of tax reform.
How reduced refunds will impact companies with mobile employees
There are two main areas where employees’ reduced tax refunds could impact their employers: company risk and employee retention.
Increased company risk due to labor laws
The elimination of the unreimbursed business expense deduction had an immediate impact. Under the old tax code, an employee receiving a car allowance could deduct business mileage. Under the new tax code, no one can deduct mileage, even if they can prove that their vehicle allowance or mileage reimbursement leaves some business expenses unreimbursed.
Employees experiencing shortfalls may seek to recoup unreimbursed business expenses under labor laws in employee friendly states. This will especially be true for employees who receive a car allowance and previously deducted mileage to make their car reimbursement whole.
If you have employees operating in the following jurisdictions, you need to pay particular attention to the possibility of lawsuits under state labor codes: California, Illinois, Iowa, Massachusetts, Michigan, Montana, New Hampshire, New York, North Dakota, South Dakota, Washington, D.C. Other states may follow suit in response to the tax reform.
Decreased employee retention
Employee retention may take a hit if your organization has not responded appropriately to the new tax landscape. Companies that take steps to ensure full reimbursement of business expenses have an advantage over companies that do not. Similarly, companies that switch from a taxable car allowance to a non-taxable vehicle reimbursement program also gain an advantage over companies that do not.
Because a standard employee car allowance is taxable under IRS guidelines, withholding reduces the monthly payment significantly – sometimes by 40% or more. This often leaves a gap between actual vehicle expenses and the monthly benefit. Employees experiencing a gap may seek out a new employer who pays a non-taxable reimbursement.
3 ways to reduce the tax reform impact on employees
There are several ways your organization can lessen the impact of the tax reform on your employees.
Eliminate tax waste from your car allowance policy
If you have employees receiving a taxable car allowance, change your plan immediately to an IRS-accountable plan (i.e. a non-taxable plan).
The employees receiving a car allowance typically drive growth (i.e. sales and service employees). These employees rely on their allowance and the tax deductions that were eliminated. The last thing you want these employees doing is focusing on what the tax reform is costing them.
Stop paying the taxable allowance. Today. You are throwing money away that could go to your employees to offset the costs of operating their personal vehicle for business. Between federal and state income taxes and FICA, these employees often lose 30–40 % of their car allowance. By switching to an IRS-accountable plan, you can leverage that 30–40 % into a boost that will offset any loss of tax refund.
Rewrite your vehicle reimbursement policy
Whether you pay a taxable car allowance or a non-taxable plan such as a mileage reimbursement, make sure to rewrite your policy in light of expense indemnification labor codes.
These state labor laws stipulate that employees must be fully reimbursed for the use of a personal vehicle for work (as well as other personal items used for work such as phones, laptops, data plans, etc.). You should fully review your current policy to do the following:
- Fully reimburse employee expenses in a transparent, defensible way
- Clarify in writing what expenses are reimbursable and to what degree
- Specify how an employee can demonstrate that an expense should be reimbursed
You want your management to be the ones working with employees on ensuring sufficient reimbursement – not the courts.
Have employees adjust their withholding for 2020
Make sure that, whatever you do, employees’ current withholding reflects the new tax landscape and reduces the chance of an unpleasant surprise during next year’s tax season.
It’s still early in the tax season; we will continue to post about taxes and vehicle reimbursements throughout the current tax season.
In the meantime, if you would like information on how much you could save by switching to a non-taxable car allowance or would like guidance on conducting a thorough reimbursement policy review, contact mBurse today.