If your company uses a flat-rate auto allowance system, this quick guide covers the pros, cons, and alternatives. Better (tax-free) options exist!
Should my company have a car allowance program?
A vehicle allowance program is problematic in the US. Taxes are deducted from the allowance on both the employee and the employer side. Tax waste can be avoided!
Let’s say you were in an enterprise that offers a vehicle allowance program, often called “flat rate.” There’s a reasonable chance that someday you’ll pass an office and hear one of your best sales reps remark to a coworker that paying out of pocket for gas and maintenance on her car when the monthly allowance was short of actual costs was, “Getting really old.” Red flag!
At first blush, a vehicle allowance program has its appeal. The cash paid out is predictable month-to-month, so you can manage to a fixed budget. Paying everyone the same amount seems to be a fair policy, even if you had to “guesstimate” what that ought to be. And while it might be a little embarrassing to admit, the “that’s how we’ve always done it” attitude can be comforting, especially when it comes to handling the VRP administration chores.
But what happens when you add employees, which ought to be a “good problem?” How about if the CFO is asking you to help find ways to cut expenses? Employee turnover is costly; it’s important to keep people happy, especially your “stars,” which includes the people who manage all those internal processes the business depends on.
Two Things are Certain – Corporate Taxes & Income Taxes
Vehicle allowance programs have been around for a long time. If you’re using one, it’s time to reevaluate, because although it seems to be the easiest way to go, it’s not the most cost-effective. Here’s why.
First, vehicle allowances are considered compensation to employees, so the company pays 7.65% FICA on every dollar and the driver is responsible for their share of income tax to the Treasury Department. What does that break down to? Let’s do a little math, assuming a $500/month per driver allowance .
- $500/month allowance X 7.65% = $38.25, so the business expense is $538.25
- Assuming the driver falls in the 22% bracket (income of 40K to 85K), they owe $110, so their realized allowance is $390. Higher wage-earners reach higher tax brackets, so they pay more tax and realize less.
Next, there are good reasons that your payroll team wants to take the VRP admin off their collective plate – the bi-weekly process is full of variables such as hires/terminations, salary adjustments, verifying bonuses and garnishments. Popular enterprise payroll systems, even in our technology-advanced world, gobble up a huge amount of resources every time payroll comes around. Add on year-end and other periodic reporting? Oy.
Part two of the grumbling overheard in the hallway might very well include, “I could go over to – insert competitor’s company name here – where they use a mobile app to track mileage and adjust compensation based on regional costs for everything from insurance to gas. Plus, they outsource the admin, so you have a team of experts that can help when you have questions.”
Standard Tax Rate Update!
Should you be using the IRS Standard Rate for reimbursement or your personal expenses, please read our blog posts from January that provide details on 2021 rate. Spoiler alert: It drops in the U.S. and increases in Canada.
There’s a Better Way to VRP
Sound business management includes recognizing cost reduction and resource optimization opportunities. Fair questions are: What should we trade our fixed-cost, entrenched business process for? What’s best for our company?
We’ll answer those questions by evaluating your needs and goals, then tailor a VRP that’s ideal for your business. We’ll also take on all or part of the administrative burden. You decide. Cardata Fixed and Variable Rate (FAVR) programs offer cost and resource utilization advantages for the company. Our mobile app, Cardata Mobile, provides seamless GPS tracking and automatic mileage capture, and real-time data transfer to the cloud for secure storage, access and reporting. And when compliant with the FAVR rules, the big plus is the reimbursement is non-taxable. Now that is a nice way to be reimbursed!
Best of all, instead of complaining to trusted coworkers about their allowance, your high performing colleagues will be
focused on their primary responsibilities.
About Cardata: Cardata provides vehicle reimbursement programs for the mobile workforce. Cardata services save money, reduce risk, and remove administration. Cardata programs are compliant with the IRS and the CRA.