Each type of business vehicle reimbursement program has its purpose in the marketplace. For example, fleet programs are great for companies whose employees need specialty equipment, like ladder racks or tool boxes. Cents-per-mile programs fit well with companies who have occasional business drivers. Fixed and variable rate programs are great for those companies who have high mileage drivers and are looking for tax benefits.
Car allowance programs have their unique place as well. These programs, also known as flat allowances, are designed for simplicity for the employer and consistency for the employee. Like any vehicle program, car allowances have benefits and challenges, and depending on the characteristics of your company, may be the right fit for you.
So what is a Car Allowance Program?
A car allowance program is quite simple, which is arguably its biggest benefit. The employer decides on an amount that they are going to reimburse the driver on a monthly basis for the business use of his or her vehicle. This amount is a fixed dollar amount (e.g. $500 flat allowance) that is typically added to the individual’s pay check every month in addition to their income. This amount is often then used for every individual on the program for consistency and fairness. In this case, every person regardless of other factors, would receive $500. In addition to this flat allowance, companies may also include a gas card for fuel expenses or allow the employee to write off fuel expenses like a standard expense on their expense reports. In some cases, organizations will create a program with higher reimbursements for those with Manager, Director or VP titles to give them an extra perk.
Why would a company use a car allowance program? When is a car allowance program a good fit?
Because of their simplicity, car allowance programs work well for smaller organizations or start-ups looking to get something in place quickly. Once an amount is decided, the allowance just needs to be added to each employee’s check through payroll. After this initial setup, there is no extra administrative work for the employer or for the employee. Other reimbursement programs like cents-per-mile, fleet, and fixed and variable rate require an amount of administrative maintenance work after setup takes place. For example, fleet programs can involve enough administrative effort to require a full-time employee (who is often the Fleet Manager) to execute the program.
Companies may also use flat car allowance programs when they are looking for a model that is easy to replicate for all employees through a standard dollar amount. When each employee receives the same dollar amount for their car allowance, the company avoids a conversation as to why one employee is receiving a different amount than another employee. If everyone is getting the exact same amount, no one will feel like they are being treated unfairly.
Why wouldn’t a company use a car allowance program? When is a car allowance program not a good fit?
Like mentioned above, every type of vehicle program has advantages and challenges. For a car allowance reimbursement program, companies find simplicity, administrative ease, and general fairness for their reimbursement program that makes a car allowance a good fit for them. So what are these challenges?
Tax Waste - We know that car allowance programs are simple because a dollar amount is simply added to an individual’s paycheck. However, this means that both the employer and employee are subject to taxes. This means that the employee is not receiving the full amount of their reimbursement and the employer is paying more than the employee actually receives.
As you can see from this illustration, this employer has decided to pay a $500 allowance. After income taxes, the employee is only receiving about $335 dollars of that $500. In addition, the employer is responsible for payroll taxes. When all is said and done, the employer paid $538 in order for the employee to bring home $335.
It is possible to make an allowance program tax free; however, this would involve an additional layer of administrative burden and eliminates one of the major benefits of a car allowance program.
Distributed Workforce - Companies should also avoid car allowance programs if they have a geographically diverse workforce. While every driver may be receiving the same amount, their actual driving costs could be dramatically different because of where they drive. Even small differences in geography can have large cost differences. For example, the city of Union Grove, WI is very small with low costs of driving, but Milwaukee is only 20 minutes away and costs there are significantly higher. This means that by paying the same flat amount to all employees, the dollar amount provided covers all vehicle and business driving expenses for some employees, but for others, it’s not enough to cover their costs.
Is a car allowance right for my company?
When it comes to picking a vehicle program, identifying your company’s needs and goals is the most important step in finding the right fit. For organizations that are just starting out, car allowance programs can help get the ball rolling and establish a simple policy that frees up resources to work toward other more important company objectives. This benefit, coupled with an easy-to-understand program that employees will likely see as fair, makes it an ideal choice for some companies.
However, as your company grows, and your mobile employees become more diverse and increase in numbers, other vehicle program options can be more cost effective, accurate, and geographically fair.
Again, start by identifying your company’s goals and objectives in order to discover which program is right for your company. At Runzheimer, we regularly meet with companies to evaluate programs to determine the best fit option.
Did this article answer your questions about car allowances? We would love to answer any additional questions about how this type of vehicle reimbursement program works for your company. You can reach out to us here, contact us on social media, or give us a call at 800-558-1702.