A company car is an amazing perk to an employee. But it is a high expense for an employer. With the prices of new vehicles at historic highs, 2023 is a good time to consider alternatives. Here are three options to consider.
Company car programs and 2023 alternatives
For organizations considering moving on from some or all of their company fleet, now may be a great time to do it. Both new and used vehicles are continuing to fetch historically high prices. Updating a fleet is more expensive than ever.
At the same time, selling used company vehicles could be a good move at this time. Used vehicles continue to hold high value, in part because of the relative scarcity of new vehicles over the past two years due to supply chain issues.
If your organization is considering transitioning away from a company vehicle program or offering company vehicles to a smaller, more select number of employees, our guide to making that transition work smoothly can be a helpful tool.
What are the best company car alternatives?
The top three alternatives to a company car each come with pros and cons. Each of these alternatives involves employees driving and maintaining their own personal vehicles while being reimbursed by the company. Which of these options offers the most upside?
1. Car allowance vs. company car
With a car allowance, the company pays a monthly stipend for the work use of a personal vehicle. The simplicity of this arrangement can be attractive. Unlike with a company car program, there is no need to distinguish between personal use and business use of the vehicle. The company just pays the monthly stipend, and that's it.
Without that accounting procedure, the payment is treated by the IRS as taxable income. And that's what makes it the least attractive option from the employee perspective. The employee goes from a very valuable benefit to a benefit that is immediately reduced by tax withholding. They now have to pay for and maintain a work vehicle while the payment intended to offset those costs is unlikely to actually cover all those costs because of taxes.
In order to make up the difference, the company would have to pay an even higher car allowance amount, subject to even further taxation, making this an undesirable option except for its simplicity.
2. Mileage reimbursement vs. company vehicle
Paying a standard mileage rate the use of a personal vehicle will for many employees provide a more generous benefit than a standard car allowance. As long as the employer pays a rate equal to or less than the IRS standard business rate (the "safe harbor" rate), the payments are tax-free. The 2022 IRS mileage rate for business is 62.5 cents-per-mile.
This approach, while simple to understand, does require the additional administrative steps of tracking business mileage and calculating payments based on that mileage. However, a properly managed company vehicle program also requires the tracking of business mileage in order to keep the benefit tax-free. So this should not be a change for employers or employees. The key is to use an accurate and automated mileage tracker that protects employee privacy.
Mileage reimbursement has two key shortcomings.
- Low-mileage drivers may be significantly under-reimbursed. This is because the reimbursement is based entirely on how much an employee drives, while many vehicle expenses are relatively unaffected by mileage (e.g. insurance, taxes, depreciation).
- High-mileage drivers can actually end up over-reimbursed (and/or be tempted to inflate their mileage amounts). Over time, this program could become increasingly costly for the company and not provide as many savings as expected in comparison to a company car program.
3. Fixed and variable rate allowance vs. company car
The IRS recognizes another non-taxable approach to vehicle reimbursement called FAVR reimbursement, or a fixed and variable rate allowance. This program holds several key advantages over a car allowance or mileage rate, making it the most desirable alternative to a company car.
- Low-mileage drivers never get shorted, and high-mileage drivers cannot be over-reimbursed. By eliminating these discrepancies, a FAVR plan benefits everyone. It eliminates inequities in pay while preventing run away costs in the event that employees start accruing high mileage amounts.
- Drivers receive reimbursement rates optimized for their location. Neither car allowances nor mileage rates can offer this level of precision. As a result employees who live and work in expensive regions receive the same rate as employees who live and work in less expensive regions.
While employees switching from the benefit of a company car to a reimbursement for a personal vehicle may feel a loss, if the employer decides it is necessary to make the change, a FAVR allowance will likely prove the most satisfying alternative. Employees will appreciate the transparency of the rate they receive.
To learn more about how your company might benefit by switching to a reimbursement model, follow the link below or schedule a discovery call with mBurse.