As 2021 begins, it's time to review your company car allowance or mileage rate and make sure that your rate is fair, competitive, and cost-effective. Here's a quick guide.
How to set your car allowance or mileage rate in 2021
The year 2020 was a tough year because of the global pandemic and resulting economic havoc. For organizations with employees who drive as part of their job, lockdowns and social distancing put the brakes on a lot of business travel. This situation has created uncertainty around expected business mileage for 2021 as well as how to derive appropriate car allowances and mileage rates.
To help businesses ensure they pay a fair, competitive, and cost-effective vehicle reimbursement, we have created a set of three rate-development tools, all free of charge. This post will focus on one of these tools: a questionnaire that helps to generate the optimal rate or rates for your company in 2021.
Here's a summary of all three tools, ideally completed in this order:
1. Assess your current car allowance or reimbursement
Using our tool called The Car Allowance Grader, you answer a set of questions about your current vehicle reimbursement program and receive a report that allows you to self-assess, identifying strengths, weaknesses, and opportunities for growth in 2021.
2. Benchmark your program against other companies'
Our second tool, Benchmarking Analysis, allows you to compare your organization's vehicle reimbursement policies with those of three competitors and three similarly-sized organizations. You answer a few questions, and within three business days you receive a report we've prepared, free of charge.
Tool 3: Calculate your new car allowance or mileage rate
Our Get Your Free Rate tool consists of a questionnaire that takes 30 seconds (we timed it). You fill it out, and we use our proprietary data to identify a rate that best fits your company's goals and your drivers' expense needs for 2021. Select the image below if you're ready to begin, or keep reading to learn more about how to develop a competitive rate.
3 needs of a 2021 car allowance or mileage rate
Many U.S. employers set a monthly car allowance amount and leave it unchanged for years. Or they just pay whatever mileage rate the IRS sets as its Safe Harbor Rate for that year (56 cents per mile in 20201). Neither approach ensures a fair, competitive, or cost-effective rate.
1. A fair car allowance or mileage rate for 2021
Neither a standard car allowance nor a standard mileage rate will generate fair payments for vehicle expenses. Different drivers working different sized territories in different regions will incur vehicle costs at different rates. There's no way around it.
The IRS mileage rate under-reimburses low-mileage drivers while over-reimbursing high-mileage drivers. And tax withholding often renders taxable car allowances insufficient for medium-mileage drivers and above, especially if they work in expensive regions.
In 2020, there were more low-mileage drivers than usual because of COVID-19, and we expect that trend to continue into 2021. This means that a standard mileage rate will tend to leave drivers under-reimbursed.
That does not necessarily make a car allowance the way to go. Congress's removal of the tax deduction for business mileage for tax years 2018-2025 dealt a blow to workers who receive a taxable car allowance. They were already losing 30-40% of their allowance to tax withholding. Now they can't deduct mileage to make up the difference.
But it's also true that if those employees are driving a lot fewer miles due to the pandemic, employers may question whether it's right to keep paying them the same car allowance.
The solution is to use data to derive flexible rates. Be open to paying different amounts or rates based on whether an employee works in a larger or more expensive region, and whether an employee drives a lot or a little.
2. A competitive car allowance or mileage rate for 2021
Because of the continuing uncertainty surrounding business travel in 2021, it will be more important than ever for companies to invest in flexible, customizable vehicle reimbursement rates. This can sound complicated, but with the right data, any organization can pull it off.
Businesses have a challenge before them in offering competitive benefits while facing economic uncertainties. They have to stay limber and responsive to opportunities for expansion that may lie right around the corner due to COVID vaccines. But they also have to live in the current reality of reduced business travel.
The fact is, companies whose employees feel taken care of during these uncertain times will retain their employees and attract new ones. Companies whose employees do not feel taken care of will be quick to jump ship when hiring expands elsewhere at some point in the future.
The solution is, again, to evaluate whether your current policy actually meets the vehicle expense needs of your employees and then to calculate your new rate based on those expenses. The mBurse rate development process can identify an ideal rate for any driver based on an appropriate vehicle, a garage zip code, and a monthly mileage amount.
3. An affordable car allowance or mileage rate for 2021
If you are wondering how to continue offering a competitive car allowance or reimbursement while keeping it affordable, you are not alone. This is an important concern, and there are ways to control costs with a properly optimized vehicle reimbursement program.
Cost control almost always proves a problem for organizations paying a mileage rate because it's easy for employees to boost their earnings by either driving more miles or reporting more mileage. Using an accurate mileage tracking system combined with an optimized rate is crucial to keeping the reimbursement policy affordable.
For organizations paying a taxable car allowance, taxation itself and the threat of labor code violations add up. There's payroll taxes for one thing, but then there's also the threat of fines and lawsuits in states like California, Massachusetts, and Illinois, where standard car allowances often are not sufficient to comply with strict labor codes.
Once again, the solution is to pay a rate that fits your employees' expenses and does not run the risk of over-reimbursing. Depending on where they work and how many miles they drive per month, that amount could vary, which is why you may need more than one rate in order to optimize.
How to calculate your 2021 allowance amount or vehicle rate
To obtain your free car allowance or reimbursement rate now, select the box below.