Best practices for running a car allowance program at work

Car allowance programs are a popular benefit for businesses with mobile employees who use their personal vehicles for work purposes. However, implementing an equitable and efficient car allowance program requires some careful finessing and consideration. 

In this blog, we’ll take a deep dive into what are considered the best practices for setting up a car allowance program that aligns with your company’s business goals and KPIs, as well as meets the needs of your employees.

The current landscape

Countless companies in the United States offer car allowances to employees who use their personal vehicles for business purposes. However, car allowance programs can sometimes lead to inefficiencies like tax waste and inequities. A major issue with conventional in-house car allowances is the tax implications. For example, many in-house car allowances are considered taxable income by the IRS because they exceed the IRS standard rate, leading to significant tax waste. This means that both the employer and the employee are subject to income tax on these allowance payments, which can reduce the overall take-home benefit of the allowance.

Additionally, without proper mileage tracking and documentation, companies risk non-compliance with IRS guidelines, putting them at risk of audit and costly penalties. 

Motivations for HR and finance leaders

HR Leaders focus on equity and fairness

For HR leaders, a key motivator is ensuring that the car allowance programs are fair and equitable. This includes providing allowances that are competitive within the industry and sufficiently cover the expenses incurred by employees on the road. 

A car allowance policy that is not based on actual expenses or business use can lead to disparities among employees. For example, employees with different mileage bands, like one driving 20,000 miles annually and another driving 10,000 miles, might receive the same $600 allowance, which doesn’t account for the varying wear and tear on their vehicles. Second, differences in vehicle types, like one employee driving a truck and another a sedan, which can lead to unequal costs, yet both might still get the same $600, ignoring the disparity in fuel and maintenance expenses. Lastly, geographical differences mean that living in high-cost areas can further skew the fairness of a flat allowance, as it doesn’t consider varying regional costs.

HR leaders should also consider the administrative burden of managing a car allowance program. This includes tracking the mileage of the drivers, calculating reimbursement rates, and ensuring compliance with IRS regulations. An accountable allowance system that uses mileage logs and a mileage tracker can help streamline these processes, reducing the administrative workload.

Finance leaders focus on cost efficiency

If you speak with a finance leader, they’ll tell you that they are primarily concerned with the financial implications of car allowance programs. One major concern for them is the potential tax waste associated with taxable car allowances. When car allowances are treated like taxable income, the result for both the company and the employees is lost money. For example, a $600 monthly allowance might only leave $420 in the employee’s pocket after taxes, with the rest going to federal, state, and FICA taxes. [1]

To address these concerns, companies can consider using a Fixed and Variable Rate (FAVR) reimbursement program. FAVR programs combine a fixed monthly payment with a variable payment based on the actual business mileage driven. This tiered approach helps ensure employees are reimbursed fairly for their vehicle expenses, including fuel costs, depreciation, and wear and tear, while also minimizing tax waste for the company.

Problems with current car allowance programs

Significant and unnecessary tax waste

Traditional in-house car allowance programs usually lead to unnecessary tax waste because the allowances are treated as taxable income. According to IRS guidelines, these payments are considered income and are subject to income tax, FICA, and possibly state taxes. 

Misunderstood program rules

Car allowances are usually the program of choice for businesses because they’re perceived as minimally administrative. However, as a result of being misunderstood, they are not usually run in an IRS standard rate compliant manner. This results in car allowance programs being taxed as income. This misalignment reduces the overall benefit to the employee and increases costs for the employer.

Not aligned with employee needs

Many car allowance programs fail to consider the actual expenses incurred by employees. For example, flat-rate allowances seldom account for regional differences in fuel prices, insurance premiums, or vehicle maintenance costs. This can lead to employees being either overcompensated or undercompensated, depending on their unique circumstances.

IRS audit risks

Being found non-compliant with IRS standards can lead to expensive audits and penalties. For example, if a company does not properly document mileage or fails to use a compliant mileage tracking system, they may face challenges during an audit. It’s essential to have an IRS-compliant vehicle program that includes accurate mileage logs and clear documentation of all related expenses. [2]

Implementing an effective car allowance program

To launch an effective and equitable car allowance program, companies should consider the following best practices:

Stick to a data-driven approaches

It’s important to use data to determine appropriate reimbursement rates that reflect the actual costs that drivers incur, including fuel prices, depreciation, and other vehicle expenses.

Consider a FAVR program

A FAVR program (detailed above) can provide a more accurate and equitable reimbursement based on actual business mileage, helping to ensure that employees are fairly compensated.

Consider a 463 Accountable Allowance 

Automate mileage tracking

Use technology, like Cardata’s app, to automate mileage tracking and expense reporting. By using dependable tech, you can avoid audit risk, reduce administrative burden, and ensure accurate record-keeping.

Cardata’s car allowance solution

Cardata offers a comprehensive tech solution for managing car allowance programs. It focuses on tax-efficiency, compliance, and fairness. Cardata’s software offers users accurate mileage tracking and reimbursement calculations. 

The Cardata app’s unique and competitive benefits allow for drivers and businesses to…

• Save up to 38% by avoiding unnecessary tax waste
• Ensure compliance with IRS guidelines and reduce the risk of expensive audits
• Use up-to-date market data to set fair reimbursement rates and support the real needs of employees on the road

Conclusion

Implementing a smart and fair car allowance program needs careful consideration of numerous factors, including tax implications, employee fairness, and administrative efficiency. By understanding the challenges and leveraging reliable technology solutions like Cardata’s, companies can create a more cost-effective and compliant car allowance program. For more information on how to optimize your car allowance program, contact Cardata today.

[1] https://www.ssa.gov/people/materials/pdfs/EN-05-10297.pdf 
[2] https://www.irs.gov/pub/irs-pdf/p5137.pdf