When an organization pays a car allowance, it is typical to pay the same amount to all employees who drive for the company. But a more equitable approach can immediately improve any organization's car allowance policy.
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. But when you look into it, this is not a fair arrangement for everyone.
Different employees working for the same company will experience differing levels of expense associated with their use of a personal vehicle for work. This simple fact is what makes an equal car allowance unfair.
Say you have two sales reps who work in different states, one in a coastal metropolis with a high cost of living, the other in a midwestern or southern state with much 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 in costs can emerge when one rep services locations that are close together and the other racks up mileage traveling between widespread destinations.
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. Yet that is exactly what happens when a car allowance policy does not take into account location based differences in costs.
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.
Very few organizations base their car allowances on vehicle expense data. Most use a number derived from a competitor or based on whatever the amount was years ago when the policy was created – possibly adjusted for inflation, but maybe not.
Data related to the various kinds of costs associated with vehicle use for business can be use to determine an appropriate car allowance amount for employees working in different locations. Gas prices look very different in California than in 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.
In order to deliver an equitable car allowance to all employees, that allowance should be based on localized vehicle expense data. Yes, this is more complicated than picking a reasonable number and sticking with it. But providing a data-derived allowance will send a strong message to employees that they are valued. And once instituted, this data-based policy will remain a solid basis for future adjustments.
The hardest part of moving to a data-driven, equitable car allowance policy is having to pay different amounts to different employees. It adds a wrinkle into benefits calculations. But organizations already pay different salaries to different employees depending on the nature of their job, their experience level, and what they add to the organization.
The nice thing about a data-based car allowance is that, unlike a salary, it is not a negotiable amount. Instead, the allowance is based on real-world evidence of what it will cost each employee to operate a personal vehicle for work purposes.
Algorithms exist that can calculate an appropriate allowance amount for each employee, based on location and territory size (i.e. mileage required). You feed the location-based data in for a theoretical vehicle that makes reasonable sense, and you get a number that will work for that employee. Computer programs can do the work for you – you just have to get partnered with the right program.
Because a standard car allowance is not based on an IRS-approved accounting method to calculating business costs, you have to pay taxes on the full allowance amount. Switching to a data-based allowance that pays different amounts to different workers will enable you to go tax-free.
Going tax-free will not only save the organization money but will also enable you to fund the changes to your program. Obtaining data and the appropriate software to calculate equitable car allowances will cost money. But the investment will easily be covered by the elimination of tax waste.
Most car allowances are reduced by as much as 30-40% due to federal and state taxes. The employer has to pay taxes on the allowance as well because of FICA/Medicare. That's a huge amount of money that can be reinvested into a better program that treats employees more fairly and removes the guesswork from remuneration.
To improve a car allowance policy, it helps to work with an expert. mBurse has FAVR car allowance programs designed to produce the results outlined in this post. To learn more about our client-centered, consultative approach, contact mBurse today.
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