What Costs Does a Car Allowance Cover?

Written by mBurse Team Member   |   Jun 10, 2024 7:00:00 AM

You company's car allowance covers a wide range of employee vehicle expenses. If you have not adjusted the allowance amount in the past three years, don't be surprised if employee retention has dropped.

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 a productive mobile workforce can be a challenge. It is vital to ensure that your company car allowance is enough to meet these employees' needs.

Since 2020, inflation has increased by 21%. Vehicle costs have been particularly sensitive. Not only have the prices of new and used vehicles risen significantly, but so have auto insurance premiums and the costs of maintenance and repairs. (Insurance premiums have increased by around 20% from 2023 to 2024 alone!) If your organization has not boosted its car allowance amount in the past three years, then it is likely too low.

Calculate your optimal 2024 car allowance (free)

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 the business portion of both operational costs and ownership costs:

  • Operational costs: fuel, oil, tires, maintenance
  • Ownership costs: depreciation, insurance, registration/license, taxes

Simply put, a car allowance covers more than just gas and maintenance. If 90% of the employee's vehicle use is use on behalf of their employer, then the employer should be covering 90% of the costs. 

Note: an allowance should cover the expected costs for a vehicle that is reasonably sized and priced for the job, not subsidize the high costs of an unnecessarily large or expensive vehicle. In other words, if a worker decides to drive a large SUV when a crossover or sedan would do, then it is not reasonable for that worker to expect the costs to be fully covered.

Standard car allowances vs. employees' business vehicle costs 

Companies that operate in multiple states will nearly always discover cost variations between employees. This is to be expected. Gas costs around $5 per gallon in California but around $3 in Kansas. Some drivers might cover larger territories than others. 

A car allowance that is high enough for one employee might not be enough for another. 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.

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.

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 annual survey found that 79% of mobile employees rated their car allowance or reimbursement amount as very important to their decisions about employment. At the same time, 60% of companies that responded were paying less than $600/month. After taxes, that amount could be $400 or less.

One first step to figuring out the right allowance amount for your company is to use benchmarking data. Finding out what similarly sized organizations and businesses in your industry pay can help you determine a fair allowance amount.

Free benchmarking report

What a car allowance covers after taxes

Under IRS guidelines, a standard monthly car allowance should be taxed. These taxes can reduce a car allowance by 30-40%. An amount that seems suitable to cover business use 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 video calls as alternatives to business travel. 

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. 

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, select the image below.

Computer mouse on desk selecting step 1 to start the process

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