What Costs Does a Car Allowance Cover?

Written by mBurse Team Member   |   May 23, 2022 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. If you have not adjusted the allowance amount in awhile, don't be surprised if employee attrition has 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 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.

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 and the business portion of 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 ownership costs. 

How much car allowance should you pay in 2022? Find out.

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 would do, then it may not be reasonable for that worker to expect the extra costs to be fully covered.

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. Gas costs around $6 per gallon in California but less than $4 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.

Has your company made adjustments in the wake of Covid-19 and high inflation? If not, review your allowance amount immediately.

Post-Pandemic Reimbursement Checklist - Download Now

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. However, remote interactions are often less effective than in-person interactions when it comes to sales and client relations.

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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