When an organization pays a car allowance, it is typical to pay the same amount to all employees. But there is a fairer method: A FAVR car allowance. A FAVR allowance makes equitable rather than equal payments.
How to pay an equitable FAVR allowance
It is no secret that everyone wants to be treated fairly. In theory, paying an equal car allowance to all employees is a fair approach. Everyone gets treated equally in terms of the payment amount. However, upon closer examination, this arrangement is not equitable for everyone.
Different employees working for the same company will experience varying levels of expense associated with their use of a personal vehicle for work purposes. This simple fact is what makes an equal car allowance unfair. A FAVR allowance, however, factors these differences into payments.
Equal vs. equitable car allowances
Say you have two sales reps who work in different states: one in a coastal metropolis with a high cost of living, and the other in a midwestern or southern state with significantly lower costs. Even if those two workers drive the same number of miles per month, the one in the more expensive location will experience higher costs. The same kind of inequality occurs when one rep has to drive more than another.
When an equal payment is applied to these unequal costs, one of the employees comes out on the wrong end of the calculation. If you pay a $600/month allowance to an employee who averages $550/month in costs and to an employee who averages $650/month in costs, that is an inequitable arrangement.
How FAVR allowances make equitable payments
The keys to improving an inequitable car allowance are data, flexibility, and non-taxation. Here's how adjustments to each aspect of your policy can bring immediate improvements to the fairness of your program.
1. Use data to calculate car allowance amounts.
Very few organizations base their car allowances on vehicle expense data. Most use a number derived from a competitor or based on the amount from years ago when the policy was created – possibly adjusted for inflation, but perhaps not.
But employees working in different locations face different costs. Gas prices appear significantly different in California compared to Texas. Insurance rates in Louisiana are higher than in Ohio. Auto depreciation, though it varies less from state to state, should be factored into a fair car allowance.
To deliver an equitable car allowance to all employees, the allowance should be based on localized vehicle cost data. This is exactly how a FAVR allowance is calculated. Providing a data-derived allowance will send a strong message to employees that they are valued.
2. Embrace flexibility with car allowance amounts.
The most challenging aspect of implementing a data-driven, equitable car allowance is determining different amounts for various employees. However, organizations already pay different salaries to employees based on the nature of their job, experience level, and performance.
A data-based FAVR allowance, unlike a salary, is not a negotiable amount. Instead, the allowance is based on real-world evidence of the actual costs each employee incurs to operate a personal vehicle for work purposes.
FAVR algorithms calculate an appropriate allowance for each employee based on their location and the size of their territory (i.e., mileage). You feed the location-based data in for a theoretical vehicle that makes sense, and you get a number that works for that employee. Computer programs do the work – you just have to partner with the right program.
3. Eliminate taxes to fund the new FAVR allowance.
Because a standard car allowance is not based on an IRS-approved accounting method, you have to pay taxes as if it were salary. Switching to a data-based allowance enables you to go tax-free.
Going tax-free will save money and fund the changes to your program. Obtaining data and the appropriate software to calculate equitable car allowance costs money. However, the investment will be easily covered by the elimination of tax waste.
Taxes reduce most car allowances by as much as 30-40%. The employer must also pay taxes on the allowance due to FICA/Medicare. That's a huge amount of money that can be reinvested into a FAVR program that treats employees more fairly.
Choosing a FAVR allowance partner
To improve a car allowance policy, it helps to work with an expert. mBurse has FAVR allowance programs designed to produce the results outlined in this post. To learn more about our client-centered, consultative approach, contact mBurse today.
Or get started with a FAVR plan comparison below.
