What Does a Car Allowance Cover?

Written by mBurse Team Member Jun 22, 2020 7:00:00 AM

You company's car allowance covers a wide range of employee vehicle expenses. If it is not high enough, the allowance could impact your employee retention rate. If you have not adjusted the allowance amount in awhile, don't be surprised if employee attrition rates have risen.

Is your company car allowance enough?

The employees who receive a car allowance typically operate in sales and service roles and therefore interface with your clients and prospects on a daily basis. They are the face of your organization. However, keeping productive mobile employees can be a challenge. It is therefore very important to ensure that your company car allowance is enough to meet these employees' needs.

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What costs does a company car allowance cover? 

Employees whose jobs require a car should expect their employer to fully reimburse the costs of using a personal vehicle for work. This means that a car allowance should cover both the operational costs of fuel, oil, tires, and maintenance, and also the business portion of ownership costs – depreciation, insurance, and fees related to registration, license, and taxes for a reasonably sized and priced vehicle for the job.

Simply put, a car allowance covers a lot more than just gas and maintenance. If 90% of the employee's vehicle use is business use on behalf of their employer, then the employer should be covering 90% of the ownership costs. If your current company car allowance does not factor in these relatively predictable, fixed monthly costs of vehicle ownership, then it's time for a big boost in the monthly stipend amount.

Standard car allowances vs. multiple employees' business costs 

Companies that operate in multiple states will nearly always discover cost variations between employees. This is to be expected, since some sales reps might cover much larger, more sparsely populated territories than others and therefore use significantly more gas and require more frequent maintenance. Plus, some parts of the country are more costly than others.

A car allowance that is high enough for one employee might not be high enough for another employee. In determining whether your allowance amount is sufficient, it can be helpful to see whether a) there's a higher employee attrition rate in certain geographic locations than others and b) there are more complaints coming from high-mileage drivers or drivers in expensive areas.

How much is a fair vehicle reimbursement

Is your car allowance increasing attrition rates?

Few employees will stay content with a job that does not compensate them fairly. A car allowance that insufficiently compensates mobile employees will lead to high attrition rates. It’s plain and simple: you have to pay close attention to whether your auto reimbursement policy is helping to retain employees or driving them away. Here's the formula: 

Standard Car Allowance + Dynamic Vehicle Costs = Employee Attrition

A fair car allowance should cover ALL reasonable costs associated with owning and operating a vehicle for work. The problem is, vehicle costs change over time, and different employees experience different costs.

Territory sizes vary, and the cost of living varies from place to place. Gas prices change, and so do insurance costs, vehicle taxes, and registration fees. Unfortunately, few organizations have a business vehicle policy that keeps up with the actual costs of operating a vehicle. Our 2018 survey found that most employers have not updated their auto allowance or reimbursement amount in the last 10 years.

If you have not updated your policy recently, or if you are providing a standard car allowance amount for all employees regardless of territory costs or size, it is probably contributing to your retention problems. There's a good chance you have many employees with unmet driving costs. 

Our 2019 survey found that 67% of mobile employees rated their car allowance or reimbursement amount as very important to their decisions about employment. At the same time, 63% of companies that responded were paying less than $600/month. After taxes, that amount could be $400 or less, leaving employees looking for a job with better benefits.

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What a car allowance covers after taxes

Under IRS guidelines, a standard monthly car allowance should be taxed. These taxes can reduce a typical car allowance by 30-40%. An amount that seems suitable to cover business use of a personal vehicle might significantly fall short after taxes. A $700 monthly allowance suddenly becomes worth less than $500, which won't cut it for a driver in an expensive part of the country.

Employees know that other organizations pay non-taxable plans like mileage reimbursements or fixed and variable rate car allowances, and they may look for work at a competitor who actually reimburses their expenses rather than just handing out an allowance that is taxed.

The costs of an insufficient vehicle reimbursement

The first step in the employee leaving the company will be modifying their behavior to reduce their costs. This in turn costs the company as employees opt to make phone calls or view webinars as alternatives to business travel. However, phone calls are often less effective than face-to-face interactions when it comes to sales and client relations. This will affect your bottom line.

If the employee leaves your company, you face a new set of costs. Recruiting, hiring and training employees takes time and money. It takes on average 42 days and $4,129 to fill an open position. This is 42 days of lost revenue and revenue generating activities. 

Employees are not going to continue working a job that does not protect their income from the costs of operating their vehicle. Make sure your organization does not make the mistake of providing a standard, equal car allowance for all employees regardless of their territory size or costs. Equal is not the same as equitable.

Mobile employees trust your organization to reimburse them properly for the use of their vehicle for business use. If their car allowance does not cover the full range of vehicle expenses, why shouldn't they do something about it?

Contact us for a free benchmarking analysis of your current business vehicle policy. We will be happy to help you find out how much you could save with a non-taxable vehicle plan. Or, if you would rather perform a self-guided evaluation of your current policy, click the button below.

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