Flat Car Allowances: What’s the Right Amount?

by Donna Koppensteiner

This post is Part 3 of 5 in the business vehicle infographic series. Next week, we will be discussing cents-per-mile reimbursements in a new infographic.
Car allowance programs offer employees a set monthly payment to use toward vehicle-related expenses. Providing business drivers that flat stipend is certainly easy to administer, but is often a deterrent to effective selling.

Providing a flat car allowance often reduces business driving by client-facing employees – here’s why:

Flat Car Allowance Programs Infographic
  • Reps that represent large or rural districts must drive longer distances to meet with appointments – whereby they consume more fuel and put additional wear and tear on their vehicle. 
  • A flat payment doesn’t account for fluctuating gasoline prices, insurance costs or increased wear and tear that naturally occurs from business driving. In many cases, high mileage reps simply cannot cover their costs.
  • If a rep cannot cover his costs, over time, he may become less likely to drive – he may extend the time between appointments or not visit clients all together. An incentive to reduce business driving results in fewer appointments and less client/potential client interaction – perhaps with your key accounts. Ultimately, this will lead to decreased revenue growth from front-line employees, resulting in a negative impact to the company’s bottom line.
Additionally, a flat-rate allowance is taxable to the employee and increases the taxes paid by the employer. In a typical example, a $700-per-month taxable flat-rate allowance increases Federal Insurance Contributions Act (FICA) tax liability approximately $640 per employee per year for the employer. Flat allowances are difficult to adjust when fuel prices fluctuate. This plan tends to favor low-mileage drivers (generally those who drive fewer than 11,000 miles annually), giving high-mileage drivers (generally those who drive more than 15,000 miles annually) a sense of inequity and an incentive to reduce business driving. 
While a flat car allowance may seem to be an easy program choice, a business vehicle analysis can help you evaluate a monthly stipend is the most equitable program for your company. A fair vehicle reimbursement should be not only easy to administer but treat all drivers—for all business mileages and in all locations—fairly.
Check back soon for our next blog post on another type of vehicle reimbursement – a cents-per-mile program, such as the IRS rate.

Posted 5/9/2013 3:19:07 PM | 0 comments
Tags: car allowance, flat allowance program, vehicle allowance


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