License Registration & Taxes
Self-explanatory; some do not have taxes or Ad Valorem fees based on where they live.
To begin this guide we’ll ask you five questions about mobile car allowances and mileage reimbursements. You may not know the answers to these questions unless you are very well read on company car allowances and reimbursements risk or follow our blog.
That's okay. As you read this guide keep some of the quiz questions in mind because the answers are interwoven throughout. At the end feel free to take the quiz again.
Does your organization employ anyone who travels for work using a personal vehicle? We call them mobile employees. Mobile employees make sales calls, manage accounts, provide training, attend conferences—and more.
Any organization with mobile employees should compensate them for the business use of their personal vehicle. This typically takes the form of a set monthly car allowance, a cents-per-mile reimbursement, or some variation on these standard approaches.
Whatever the type of compensation plan your organization uses, there are several questions that management needs to answer:
While these questions certainly have answers, in our experience, many organizations opt to keep things simple and go with “whatever works.”
It’s easy to just go with an allowance amount that seems reasonable or just pay the IRS mileage rate or business mileage rate and leave it at that. Why spend time and energy researching, computing, and re-evaluating your policy when the one you’ve got is simple, understandable, and easy to administer?
But the situation is more complicated. In fact, your car allowance or mileage reimbursement may be costing the company in a variety of ways that are easy to overlook.
This guide will help you pinpoint the strengths and weaknesses of different policies, including your own. A finely-tuned policy can accomplish a range of company goals:
Protect the company from various risks associated with mobile employees.
For a lot of businesses, the burning questions are:
But before you address these questions, you have to consider what employee expenses you’re responsible to cover.
Fuel is the obvious one, but there are many others as well. Several states (California, Illinois, Massachusetts, Rhode Island, North Dakota, and South Dakota to name a few) have laws governing the reimbursement of mobile employees for work-related expenses. California’s law is the most explicit, so we’ll use it as our guide.
CA Labor Code Section 2802(a) states that:
“An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”
Furthermore, Section 2802(c) defines “necessary expenditures or losses” to include “all reasonable costs.
Let’s consider what might be construed as a reasonable cost.
First of all, if an employee is using a personal vehicle for work, that vehicle is going to accrue more mileage and incur more wear and tear than it would otherwise if the employee only used it to commute to work. Increased mileage means faster depreciation and more frequent changes of oil, tires, brake pads, etc.
Plus, it could be argued that the employee might not necessarily need the vehicle if he or she held a different job, justifying reimbursement for certain fixed expenses, including property taxes, registration, and car insurance. If the company requires a high level of insurance coverage (and it should), the higher premiums should also be factored in.
Suddenly now, the list includes quite a few expenses:
Fuel, oil, tires, taxes, registration, insurance, depreciation…It adds up, doesn’t it?
Complicating the matter, not all employees experience the same costs. Auto insurance premiums are higher in Michigan than in Oklahoma. Gas prices are higher in California than in South Carolina. Some employees travel 2,000 miles every month while others travel 3,000 miles.
We’ll explore how to address these differences later, but for now, you need to understand the scope of your employees’ expenses.
You may already be wondering whether your organization’s current allowance or reimbursement amount should be adjusted. First, though, you need to consider the questions of taxation and policy “fit” (i.e. how well the policy type fits the company and its employees’ needs).
Because tax withholding can significantly reduce a mobile employee’s take-home pay, it’s important to take taxation into consideration when determining a reasonable car allowance or mileage reimbursement.
Let’s look at the most common plans companies use to offset employee business expenses and how/whether they should be taxed.
The company pays a fixed amount to each employee every month. This fixed amount is considered compensation and therefore subject to taxation at both the federal and state level. Furthermore, the employer must also pay FICA/Medicare taxes on the allowance.
Instead of paying a fixed monthly amount, the company multiplies the employee’s monthly reported mileage by a specific cents-per-mile rate and pays the resulting amount as a reimbursement. As long as this business mileage rate does not exceed the IRS mileage rate ($0.58/mile for 2019), the reimbursement remains non-taxable.
A company can avoid taxation of a car allowance by tracking the business mileage of its employees. Every month, each employee’s mileage is multiplied by the IRS mileage rate. The employee then receives the lesser of the car allowance amount and the mileage rate multiplied by the mileage. In the past, excess mileage could be deducted from next year’s income taxes but that has changed (more on this in our Tax Reform section below).
The company pays a fixed amount plus a mileage reimbursement. The fixed allowance is taxable but not the mileage reimbursement, as long as the mileage rate does not exceed the IRS rate.
In addition to a fixed allowance, the company either supplies the employee with a credit card used only to purchase gas or reimburses for the receipts for gas expenditures. Not only is the car allowance taxable, but so is any portion of the fuel expenditure that cannot be demonstrated as business use. The company must charge back the employee for any personal gas use to avoid taxation.
Whereas the IRS mileage rate was designed to be a tax deduction tool for individual tax filers, FAVR was designed as a corporate tax tool to reimburse employees more accurately than the IRS mileage rate can while still keeping the reimbursement tax-free. In a nutshell, using expense data for the employee’s garage zip code, the employer pays a combination of a fixed monthly amount and a variable reimbursement rate.
The two most popular business vehicle policies—the standard car allowance and mileage reimbursement at the IRS rate or business mileage rate—both come with two clear advantages: simple to understand, easy to administer.
But as you examine each type and its variations more closely, you find that simplicity and ease often come at a cost.
As the mobile workforce has grown, reimbursement models that worked well in the past have become less of a “fit” for many organizations. Originally, car allowances were paid as disguised compensation. The car allowance was a catchall to cover car expenses as well as a way to increase to total compensation without actually negotiating the salary. When fewer jobs involved significant travel using a personal vehicle, this system worked fine.
But with cars increasingly becoming the de facto “office” for many workers, the standard car allowance has not kept up with the needs of these employees.
Similarly, the IRS mileage rate, created as an individual tax deduction tool, has become less suitable as the number of mobile employees and total mileage amounts have increased. The IRS rate, intended only as a general measure of vehicle costs, cannot capture costs with precision. This lack of precision increasingly proves problematic as the number or variety of mobile employees increases within an organization.
A small company whose employees all drive between 100 and 400 miles per month may find the IRS mileage rate a suitable tool, but a larger company with more high-mileage employees may find the IRS rate simply unaffordable.
Both a car allowance and a mileage rate share one fundamental problem: applying an equal amount or rate to widely unequal expense needs.
A company with a variety of employees driving for work cannot address that variety using a standard rate or amount. Disparities will emerge due to varying territory sizes and costs:
Adding variations to these common policy types, such as fuel reimbursement or mileage substantiation, sometimes can help, but just as often they can create new problems. It’s crucial to understand the exact limitations inherent to each policy type before deciding the policy type and amount that would best fit your company and its employees. If the company continues to pay the same amount to each employee, some will be shortchanged, while others will receive more than is needed.
A standard monthly car allowance has three drawbacks that a company must face.
Given a $500 monthly allowance, how much actually goes to pay vehicle expenses? Less than you’d think. An employee in the 24% tax bracket will take home only $341.75 after subtracting both income taxes and FICA/Medicare. Plus, the company pays $38.25 for FICA/Medicare on that $500.
After factoring in gas, maintenance, depreciation, tires, and all the other expenses related to operating a vehicle for work will that $341.75 truly cover the employee’s expenses?
A single employee’s expenses can vary month-to-month. Two different employees in the same company can have widely different expenses. Gas prices rise and fall, territory sizes differ, and geographically-sensitive expenses can vary widely.
Compare the average fuel and insurance costs between three different states:
Paying the same amount every month can create fairness problems as well as shortchange some employees and lead to undesirable employee behavior.
The 2017 mBurse Auto Allowance Survey revealed that fewer than one-third of companies based their car allowance on actual expense data. And 89% had gone seven years or more since last evaluating and updating their allowance amount. Costs have changed a lot over the past seven years.
How can anyone expect their car allowance to meet all employees’ needs when the amount has no basis in data and goes unreviewed for years?
Let’s be clear about one approach that’s off the table as of 2018:
“Just write it off on next year’s taxes.”
Until 2026 at the earliest, employees cannot deduct unreimbursed business expenses. Before 2018, employees could track business mileage and deduct the equivalent of the IRS mileage rate on Form 2106. They could essentially offset the taxes being withheld and recoup any extra vehicle expenses not fully covered by the monthly allowance amount.
But the Tax Cut and Jobs Act passed in December 2017 changed all that for the next seven years. We’ll explore the tax reform more below, but it’s crucial to understand that using tax deductions to address car allowance shortcomings simply is not an option.
Here are some steps a company can take:
As you can see, taking any step to address the shortcomings of car allowances will cost either time or money or both. Most of these solutions require adding a mileage log to the picture as well. But to do nothing will cost far more in the long run—a point we’ll return to later.
Mileage reimbursement shares two of the same problems as car allowances—expense variations and lack of precision—and adds a new challenge: cost control.
In theory, a mileage rate should help with expense variations because, generally speaking, the more you drive, the more it costs. In reality, however, vehicle expenses fall into two categories: fixed and variable.
Fixed costs, such as insurance, taxes, and registration, actually become less costly per mile when spread over a higher number of miles driven. Variable costs, such as gas, maintenance, and tires, tend to increase with miles driven, though other factors such as gas prices impact these as well.
As a result, a high-mileage driver tends to be over-reimbursed relative to a low-mileage driver. Here’s an illustration using the 2018 IRS rate of $0.545/mile:
Both employees pay the same amount for their driver’s license, vehicle taxes, and car insurance (for the most part). Employee B will spend more on maintenance and tires and spend a lot more for gas. But Employee B is not going to spend $13,352.50 more in gas, maintenance, and tires than Employee A. Plus, Employee A’s car depreciation by itself will likely exceed $2,000.
Here is just one example of the business costs of a midsize vehicle costs:
This is a huge inequality, and it happens all the time.
Most mileage rates do not fluctuate with gas prices, adding to the problem. For example, the IRS rate only generally tracks with gas prices but historically has not adjusted with spikes.
The IRS mileage rate was never designed to accurately reflect all motorists’ vehicle costs. Instead, the rate is derived as an average of all vehicle expenses across the entire United States from the previous year, which works just fine in terms of taxation but less so for companies seeking to accurately reimburse employees.
Different motorists in different parts of the country experience different levels of expense per mile driven. But as far as the IRS is concerned, it all averages out across all tax returns. Some taxpayers end up deducting more than their actual costs, while others less than their actual costs—but it all evens out for Uncle Sam.
If mobile employees are being shortchanged by the IRS rate, they may drive unnecessary miles to increase their reimbursement. If they are being over-reimbursed, however, that becomes an expensive problem for the company.
Most companies rely entirely on the employee to record business mileage. This creates a cost control problem.
Because neither the IRS mileage rate nor most company-derived mileage rates adjust automatically with gas prices, there are times when a sudden increase in gas prices brings a sudden decrease in cash flow for the employee. The same thing happens if their insurance or personal property tax rates increase.
In situations where business expenses increase but the
If your company uses an Excel spreadsheet to record mileage, what’s to stop an employee from fudging the numbers? Similarly, if employees are estimating mileage to save time, why wouldn’t they “round up” in their calculations? (Here's how to tell if your employees are over-reporting mileage.)
When using a mileage reimbursement rate, it can be very difficult to control costs because so much of the mileage reporting lies in the employee’s hands.
Here are three steps you can take to keep a mileage reimbursement program from miring the company in uncontrollable costs.
Remember, the IRS rate is an average of all averages. You need to find out what range of expenses your employees experience in their respective territories and roles. A good starting point would be to look at gas prices, average insurance premiums, and tax rates in each employee’s territory. All of this information can be found through a simple Google search.
For a more comprehensive approach, contact mBurse to obtain cost data for each employee’s territory, which can help guide you in choosing an appropriate mileage rate that can be adapted to different employees’ needs.
If your mileage rate fluctuates with gas prices, employees will be far less likely to offset a price increase by reporting extra mileage. Make sure to have a person whose job involves evaluating the mileage rate on a regular basis to make sure it’s neither shortchanging nor overpaying employees.
Fixed and variable rate reimbursement combines steps 1 and 2. FAVR also addresses the discrepancy between high-mileage and low-mileage drivers by paying a set monthly amount in combination with a variable mileage rate. Learn more about FAVR here.
When it comes to a mileage tracker for business, the most accurate mileage logs available today are GPS apps that employees can operate from their smartphones. These apps precisely capture business mileage without any manual reporting. The mBurse GPS app, TripLog, offers features that protect each driver’s privacy.
These GPS mileage logs can also integrate with the company's CRM software and payroll software to keep employee time focused entirely on job responsibilities. There are quite a few options when it comes to mileage tracking and it's best to make an informed decision on what fits best for your company and culture.
We’ve already covered tax waste, cost control, and inequitable compensation of employees due to expense variations. But there’s also a domino effect that touches other aspects of an organization:
If you fail to sufficiently reimburse all employees, not only do you open the door to labor code lawsuits, but you also open the door to employees taking risky measures to cut their own costs. For example, an employee might reduce his or her insurance coverage. If that employee causes a car accident while working, your company’s insurance may be forced to close the gap between the employee’s insurance and the costs of the accident.
Under-reimbursed employees may also recoup lost income by reducing the amount of driving they do. Over time, less driving may compromise sales productivity and client relations. Reduced travel can mean fewer face-to-face meetings with clients and potential clients or inconvenient meeting times for clients. Client relationships may suffer, and sales may decrease.
Some employees will simply leave the company if they cannot obtain sufficient reimbursement or realize that the reimbursement structure creates inequities. Check your attrition rates. If it has been years since you’ve adjusted the allowance or reimbursement, don’t be surprised if attrition has increased during that time period. Changes in the 2018 tax code may push more employees out the door as well.
And don’t forget that potential employees will learn as much as they can about the company’s reimbursement method. If they project insufficient reimbursement, they may not seek or accept a job there.
Company car allowances and mileage reimbursements have assumed even greater importance under the new tax code.
Under the Tax Cuts and Jobs Act (TCJA), enacted December 21, 2017, employees cannot write off unreimbursed business expenses during the 2018-2025 tax years.
This change will pose a problem for companies with employees in employee-friendly states like California and Massachusetts that have reimbursement indemnification labor codes. These labor codes ensure that companies cannot pass business expenses to employees.
In the past, an employee could write off actual business expenses or use the IRS mileage rate as a guideline. An employee receiving an allowance could deduct mileage using the IRS rate, and an employee receiving a mileage rate less than the IRS rate could deduct the difference between their company’s mileage rate and the IRS rate.
Either way, the employee had recourse to offset insufficient compensation or reimbursement. Now, employees may seek other forms of recourse, such as class action lawsuits for labor code violations or unproductive driving behavior.
The tax reform does lower tax brackets. However, removing the opportunity to fill out form 2106 for unreimbursed work expenses will have a bigger impact. This change will increase the number of employees seeking full reimbursement from their employers. That reality, in turn, may lead to an expansion of state laws indemnifying employees from company expenses.
The strict laws of California and Massachusetts could spread to other states. The domino effect could eventually lead to increased class action suits across the country as the consequences of the TCJA become more apparent to employees and their representatives in state legislatures.
Two groups of employees most affected by the tax reform will include moderate-to-high-mileage drivers who receive a car allowance and low-to-moderate-mileage drivers who receive
Two examples of drivers in 2018:
Driver 1 received an enormous benefit under the old tax code. That $21,800 deduction equated to more than a $5,000 decrease in taxes at the 25% tax bracket. But the 2019 tax bracket reduction to 24% will cover only a fraction of the loss of that gigantic business expense deduction.
Driver 2 received a lesser benefit under the old tax code because the reimbursement came closer to actual expenses. But it was a significant benefit nonetheless that will not exist for the years 2018-2025.
If employers do not take heed of the new tax code, employees like Driver 1 and Driver 2 will either look for work elsewhere or take the company to court—which could get a lot easier as state legislatures strengthen labor laws in response to the TCJA.
The reality should add urgency to getting your policy type and amount right in 2019.
The current tax landscape has raised the stakes for companies across America. The window to get your business vehicle policy right is rapidly closing.
In the spring of 2019, millions of mobile employees will file their taxes. Some will realize for the first time that they can’t file Form 2106 to deduct vehicle expenses. Others already know this and are taking measures even now to protect their income.
Either way, thousands of organizations could find themselves in a bind as employees awaken to the new landscape if they don’t do something now. Sticking with the status quo is not an option unless you’ve already been doing it right.
Now is the time to take concrete steps to investigate and adjust your policy. At the very least, you need to do the following:
Hopefully, you’ve figured out the answer: It’s complicated!
Because mobile employees within the same organization often experience widely different costs, there’s no quick and easy way to determine the right amount. Without knowing an employee’s mileage and zip code and the size of vehicle required to carry out the job, it’s impossible for someone to tell you the right amount. But there are some clear-cut principles that you can follow.
Because the expenses among employees will vary, the allowance amount or reimbursement rate must be able to generate different payment amounts. It’s possible that a small company with a narrow range of employee expenses can get away with a standard allowance amount or mileage rate, but even then there will be disparities between expenses and reimbursement for some employees
The number of miles driven affects everything from fuel consumption and tire wear to maintenance and depreciation. Employees with larger territories will drive more, and you have to take this into account. Failing to incorporate mileage into the amount will result in low productivity from shortchanged employees. Remember also that high-mileage employees can end up being over-reimbursed once they reach a certain number of
Gas prices, insurance premiums, taxes/registration/license fees, and maintenance costs are all regionally-sensitive. And some of them will be a lot higher than you expect. It’s vital to calculate, given a reasonably-sized vehicle garaged in a particular zip code, what each employee’s expenses will be and to incorporate that data into the amount the employee receives.
It should be clear now that different employees should receive different amounts and that those amounts should be based on actual data. This is the only way to ensure equitable reimbursement and to prevent the costly consequences of over-reimbursing and under-reimbursing.
To get started, use the interactive graphic below to discover the average costs of owning and operating a vehicle. You might be surprised at what you find. Hover over different parts of the car to reveal different cost categories and the average amount U.S. drivers experienced in each category over the past year.
Self-explanatory; some do not have taxes or Ad Valorem fees based on where they live.
The amount is based on the car model, and the driver's age, driving record, and location.
The amount of value an auto loses over time. That figure can vary dramatically from car to car.
When you add up these average annual costs, you get a monthly expense of $615.50. And that’s average. If you’re paying a $600/month taxable car allowance to the average American driver, you’re not even coming close to meeting that person’s monthly expenses. After taxes, that $600 might be as little as $400.
And what if you’ve got a high mileage driver in an expensive state like California, where gas and maintenance prices are through the roof? Or in Michigan, where insurance rates are the highest in the country? Those drivers' monthly vehicle expenses could easily reach $1,000.
Notice also that depreciation and insurance together make up over 60% of the costs of owning a car. That could pose problems for a low-mileage driver receiving a mileage reimbursement since those fixed costs are only marginally affected by miles driven.
At this point, you could use these average costs to estimate the needs of your individual employees based on whether they face below average or above average costs as determined by geographic location, territory size, and vehicle type. But you could also use tools that will give you more specific data.
mBurse can quickly provide the data and pinpoint an ideal allowance amount or mileage rate for your drivers. Visit our Professional Services page for more information.
You have a responsibility to protect each employee’s income from the costs of using a personal vehicle for work. There are IRS-accountable plans designed specifically to help businesses address the variety of vehicle expenses their employees experience. The time is now—review the recommendations throughout this guide, and commit to improving your car allowance or mileage reimbursement policy today.
Remember that the 2018 tax season will be here before you know it. If you wait until 2019 to make changes to your car allowance or reimbursement policy, what will the consequences be?