How To Input Car Allowances On Employee Paychecks

Introduction

Designing a car allowance problem poses many questions to the savvy manager or businessman. How much is it appropriate to pay each driver for their car allowance? How do you make sure you’re remitting taxes on car allowances appropriately? Are those funds allocated in a way that ensures the greatest possible return on your investment?

Each dollar spent on an inefficient car allowance program goes directly to the Internal Revenue Service rather than your driver’s pockets. There’s also a hidden cost of designing a car allowance program: designing an administrative system that makes filing and reporting mileage reimbursements more straightforward and transparent.

Administering car allowances – a hidden cost

Administrating car allowance programs isn’t as simple as inputting numbers on a spreadsheet. Some methods have complex reporting procedures. For programs like Fixed and Variable Rate (FAVR) reimbursements, firms must calculate depreciation costs based on the model and year of each employee’s vehicle. [1]

(See our FAVR glossary for more information on FAVR procedures.)

If tracking actual expenses, employees must save all receipts and documentation of expenditures. For each actual cost paid by an employee, the IRS stipulates that all records kept for reimbursement payments must document the following three variables:

• Amount. The IRS suggests that employees document “the cost of the car and any improvements, the date [the employee] started using it, the mileage for each business use, and the total miles for the year.” [2]

• Time. Date of the expense or when the car was used. 

• Place or description. Where the car was driven to, this can be a simple description like “123 Street Name, Place, State.” However, the most effective mileage tracking solutions include GPS data to back up claims.
• Business purpose. What was the business purpose of the trip, and how does the travel relate to what your employee is responsible for or what your company does?

As this illustrates, keeping up with IRS requirements for car allowance recordkeeping and administration can be a full-time job. And that is before factoring in the need to account for car allowances on employees’ paychecks.

How to input car allowances on an employee’s paycheck — general principles

There are no easy answers to the question of where to input an employee’s car allowance on a paycheck, primarily because each business uses a different payroll system.

That means the first principle when reporting car allowances on an employee’s payroll is to read the user’s guide for your payroll software.

Many payroll software companies provide specific instructions on how to input car allowances. Here’s one guide written by Vista, for example. [3] You won’t get much value from it unless your office uses Vista accounting software, but seeing an instance of what you’re looking for can be helpful.

Is there a payroll department in your office? Are you a sole proprietor who hires a bookkeeper to handle your accounting needs? There may be someone you can ask for help.

You may also confirm this by reading their public literature, such as Publication 15 C-E, or speaking to an IRS agent. [4]

There are some shortcuts we can take, however. Here’s one of them.

A quick rule of thumb: accountable or non accountable auto allowance?

Knowing whether the IRS considers your car allowance program accountable is very important. Not only can it save you money, but it also can simplify procedures. It’s not a hard rule, but a rule of thumb: most accountable car allowances won’t be input as income on an employee’s paycheck.

Therefore, if you know you have an accountable car allowance program, you will not report the payments made in the same field as your employee’s income.

Each payroll software will have its own designated field for extraneous income. Check your software’s user’s guide to find out where to record it.

If your car allowance program is a nonaccountable plan, input your employee’s car allowance into the income category on your payroll software.

It will be considered income by the IRS and can be added to your employee’s base salary. You will remit the same taxes you would on their salary – federal and state payroll, Social Security, and Medicare taxes.

A quick primer on accountable versus nonaccountable plans

Any benefit program is considered accountable in the eyes of the IRS if it satisfies particular conditions, and qualified therefore for tax-free status.

In IRS Publication 5137, the IRS lays out these conditions, possible exceptions, and reporting requirements. [5] 

You can find our primer on accountable car allowance programs here if you’d like to learn more. We explain the three important IRS conditions for accountable benefit programs and what happens when your program doesn’t meet these criteria. (Hint: it involves paying more taxes.)

The importance of designing a smart car allowance payroll system

We are living in the age of automation. Many complex human life and society tasks have been outsourced to applications or software programs.

Most of us still need to learn how to program GPS coordinates and rely on our phones for directions. We require limited knowledge to use the product because the process has been developed for us.

Programs that track employee vehicle mileage simplify car allowance payments by recording employee mileage automatically. Sophisticated GPS systems log business trips in real-time.

Some mileage apps even pay employees directly via direct deposit using the mileage data they collect. This bypasses the need to record car allowances on an employee’s pay stub because the payment is handled securely by a third party. Convenience and simplicity make designing a FAVR program a breeze. 

Get Advice From An Expert

It’s okay to ask for help when faced with a complex problem. We turn to grocers to answer the question of “what’s for dinner,” lawyers for the question of “is that legal,” and doctors to answer the question of “how can I keep my good health?” and think nothing of it.

It is perfectly appropriate to leave the accounting to the accountants and the cooking to the cooks.

Owning a business does not mean you must become a scholar in the arcane arts of the Internal Revenue Service. But it’s a good idea to consult someone who knows the subject well when the stakes are high. Indeed, there are always possibilities like tax penalties or fraud at one end of the spectrum.

Outsourcing some or all of your car allowance program makes sense for many operations, especially those operating at larger scales, where every dollar makes a difference.

Work with a firm that specializes in car allowances, like ours. Cardata has over twenty years of experience administering and designing vehicle reimbursements. From mileage tracking to payments, our software automates and accounts for everything.

Sources

[1] Announcement 2000-48 | Internal Revenue Service

[2] Publication 463, Travel, Gift, and Car Expenses | Internal Revenue Service 

[3] Processing Car/Auto Allowances with an Employee’s Paycheck | Viewpoint Help 

[4] 2023 Publication 15 | Internal Revenue Service 

[5] Publication 5137 | Internal Revenue Service 
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, 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.