When employees drive their own cars for work, they’ll inevitably incur expenses — like paying for gas. To help driver employees cover this cost, companies sometimes offer a gas allowance. With many companies that require employees to use their personal cars for business, and with the rising cost of fuel, having a program that addresses the expense of gas is an important benefit for employees.
What are gas allowances?
Gas allowances are a payment amount provided for employee drivers to use for paying for gas for business trips. They’re similar to car allowances — and may often be referred to interchangeably — but gas allowances tend to be specifically intended to compensate for the cost of using fuel for business trips. In turn, a car allowance is a more broad term that might cover more types of business expenses of a personal car, like maintenance, repairs, and more.
Providing a gas allowance — or some sort of financial compensation — is best practice for companies who have employees who regularly drive for work.
Gas allowances in 2023
Gas allowances are typically considered taxable income by the IRS. However, when allowances are provided through an accountable allowance program, there’s a possibility for tax savings when IRS rules and regulations are complied with. This includes responsibilities like keeping detailed records of mileage, business expenses, and more.
When the amount of the allowance doesn’t exceed the IRS Standard Rate, then it can be considered as tax-free income by the IRS. In 2023, the mileage rate is 65.5 cents per mile, and this rate is updated by the IRS on a regular basis. It’s important to be aware of all of the other guidelines in an accountable allowance program to ensure that your allowance program is genuinely compliant.
Companies are adapting their compensation packages to include gas allowances to attract and retain employees as part of a strong benefits plan.
What are the benefits of gas allowances?
Gas allowances can be a helpful benefit for employees, since they importantly help to compensate for their business expenses using their personal cars. This could increase employee morale and satisfaction, thus also helping to promote employee retention.
Providing allowances or reimbursements for business travel — like through a gas allowance — can also potentially increase employee productivity and efficiency. If employees have to use their own personal funds for business driving, they could be less likely to make those work trips. An allowance encourages employee drivers to do the necessary travel for work.
However, gas allowances are considered to be taxable income by the IRS. This is unless specific record-keeping has been done under IRS guidelines to make it an accountable allowance program. When allowances are provided through an accountable allowance program, it can result in tax savings — both for employees and for companies.
For companies with regular employee drivers, it’s worthwhile looking into eligibility requirements of non-taxable vehicle reimbursement programs.
What is a fuel card?
Fuel cards, or gas cards, are similar to a gas allowance. While a gas allowance is a lump sum of money given, fuel cards are typically a payment card that’s specific to a fuel company. However, since fuel cards are often third-party gift cards, this can create added complexity when it comes to a compliant allowance program.
Fuel cards can be a simple option with minimal administration required. However, as convenient as it may seem to hand employees a card they can use for gas, there are a few drawbacks to be aware of:
1. Limited Acceptance
Fuel cards are typically issued by specific fuel providers or networks. If employees need to refuel at a station that does not accept the company’s fuel card, they may need to use personal funds or submit an expense report for reimbursement, leading to inconvenience and potential delays in business operations.
2. Geographic Restrictions
Some fuel card programs may have limitations on where the cards can be used. This can be an issue for employees who travel extensively or work in remote areas where the designated fuel stations might be scarce.
3. Potential Misuse
Without proper monitoring and controls, fuel cards can be misused by employees for personal purposes. This can lead to unauthorized fuel purchases and misuse of company resources, resulting in additional costs for the company.
4. Administrative Burden
Managing fuel cards and tracking expenses can be administratively complex, especially for companies with a large workforce. Proper record-keeping and reconciliation of fuel expenses require time and effort.
5. Limited Use for Non-Fuel Expenses
While fuel cards are designed for fuel purchases, they cannot be used for other vehicle-related expenses like maintenance, repairs, or tolls. Employees may need to rely on other reimbursement methods or out-of-pocket payments for these expenses.
6. Potential Security Risks
Fuel cards, like credit cards, carry the risk of fraud or theft. If lost or stolen, unauthorized individuals might use the fuel cards for unauthorized transactions before they are reported missing.
7. Dependency on Fuel Prices
Fuel card programs may have fixed fuel prices or discounts, but they are still subject to fluctuations in fuel costs. If fuel prices rise significantly, companies might face unexpected cost increases for fuel allowances.
8. Overhead Costs
Implementing and managing a fuel card program involves setup fees, transaction fees, and ongoing maintenance costs. For smaller businesses or those with limited fuel expenses, the overhead costs may outweigh the benefits.
Based on the drawbacks above, it’s clear that while fuel cars and gas allowances are an option, they can sometimes not be worth it. There are other options out there for a more comprehensive option — one that’s flexible, accounts for all business expenses beyond just gas.
Switching to a mileage reimbursement program
Now that you have a sense of the different costs and benefits of gas allowances and fuel cards, you may be considering looking into non-taxable reimbursement options for your employees and business.
1. Assess the need for change
How is your current reimbursement approach, if any, working? If you’re providing a gas allowance or another taxable benefit, take a thorough look at the benefits and drawbacks. Consider requesting feedback from employees — this will help you identify areas for improvement.
2. Choose the right reimbursement method
Once you’ve gathered data on what’s been effective and what hasn’t, then you can pick the right reimbursement method that’s the best fit for your company — including budget and employee needs. Know that certain programs have their own set of eligibility requirements that your company has to fit into. Also, be aware of the IRS standard mileage rate and any other applicable rates, as these could impact your chosen reimbursement method.
3. Establish clear guidelines
Having easy-to-understand documentation of your program is essential. Be sure to put together a comprehensive policy that defines any relevant details for your employees, including things like the documentation required for mileage tracking and expense claims, standards for reimbursements, restrictions on personal use of a car during business trips, and more.
4. Communicate and train
Be sure to communicate, with ample notice, the switch to your chosen reimbursement program. Beyond documentation, it’s also a good idea to train employees on how to track business mileage, claim expenses, and more. If you’re switching to a tax-free reimbursement program, make sure to clearly communicate the specific benefits to your employees.
Next up — turning the program into a reality. Set a specific launch date and share it in advance. Ensure that you’re providing easy-to-use systems — such as mileage tracking software — for employees to track their business mileage, and for the company to process claims. Consider designating a contact person at the company to handle reimbursement queries when they come up, so you can be sure that questions and concerns are dealt with effectively.
6. Monitor and adjust
Once the program is in motion, be sure to regularly review it though audits, collecting feedback, monitoring claim submissions, and more. Based on any changes in regulations, employee feedback, or shifting company goals, you can make changes to the program to ensure it stays effective.
7. Ensure compliance
Through the entire program, ensure that it stays compliant with IRS rules and regulations. Be sure to follow any guidelines for the program of your choice, including keeping detailed records of business mileage, reimbursements, and other business expense documentation.
There are plenty of benefits of a mileage reimbursement program, but what goes along with those benefits is additional administrative work. Outsourcing your mileage reimbursement program can be a great strategy to reduce the administrative burden on your employees.
Beyond saving time and energy on the work itself, working with a specialized provider who works within IRS guidelines can also help ensure compliance, offering a sense of peace of mind.
Gas allowances and fuel cards are just one of many options for compensating your employees for using their own personal cars for business trips. While both are relatively simple options, they’re also considered taxable income.
Based on the significant potential savings of substantiated, tax-free reimbursement programs, it’s worthwhile to look into whether your company is eligible for these options, and the benefits of making a switch.
Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.