By Motus
April 23, 2024
It’s easy to understand why car allowances are a popular vehicle program. Also known as vehicle allowances, they’re simple to implement and easy to keep track of. All driving employees receive the same monthly stipend. However, depending on the amount of stipend offered, the geographical location where a worker is located and the mileage individuals are traveling, a car allowance isn’t always enough to cover the cost of driving for business. With the shifting price of gas, companies have started to see this issue. Many have decided to offer a fuel card in addition to the car allowance. While it seems this would be a nice supplement, this choice has costly consequences. Let’s examine the concerns of combining a car allowance and fuel card and explore potential solutions that are more financially favorable.
Car allowances may be easy to manage, but they’re far from perfect. First, they don’t consider the miles employees actually drive, the location they travel in or the specifics of those costs. These programs also don’t take into consideration variable costs of driving, which often fluctuate – like gas for instance.
When gas prices are high, employees pay more at the pump in order to continue driving for work. Car allowances don’t account for the increased cost employees are paying. With this, companies are inevitably overpaying or underpaying workers within their organization, leading to wasted spend for those who receive more and drive less, and compliance concerns for those who drive more and receive less.
Car allowance programs are also costly from a tax standpoint. As the IRS considers these lump sum payments additional income, each allowance is subject to both a Federal Insurance Contributions Act (FICA) tax and income tax. So, employers pay more and employees receive less.
These realizations often lead to employers looking to problem solve. Frequently, they look to fuel cards as a solution.
In this situation, employees driving their personal vehicles for work can pay for their gas using a company-provided fuel card. That makes the car allowance and fuel card combination a winning solution, right? Unfortunately, that’s not the case. In fact, it only introduces greater issues.
On average, Motus has found that fuel accounts for nearly one-quarter of all vehicle program costs. As fuel costs rise, this percentage of spend only increases. When organizations provide fuel cards, it enables employees to gas up their vehicle without needing to use personal funds. While it’s a benefit for employees to not have to pay work costs out of pocket, fuel cards make it incredibly difficult for employers to track specific usage. Without knowing what amount of spend goes towards work-related mileage, or if a card is being misused by an employee for personal gas spending as well, employers ultimately end up overspending.
In this scenario, tax considerations are not favorable either. When fuel cards are not substantiated by business mileage, they’re also considered taxable.
It may seem like there’s no good solution, but there are a few ways to untangle the car allowance and fuel card mess. One option includes an Accountable Allowance. Another is a Fixed and Variable Rate (FAVR) Reimbursement program. Here’s more on these choices for employers looking to overcome the previously mentioned hurdles and navigate these otherwise tricky programs.
This offering substantiates car allowances with automated tracking and reported mileage. With IRS-compliant mileage logs, reimbursements can be made up to the IRS mileage rate tax free – creating savings for both employers and employees. However, as reimbursements remain the same for all employees, it’s still an inaccurate and unfair reimbursement method overall.
Unlike a one-size-fits-all program, FAVR reimburses employees for both their fixed and variable costs. With this, employees receive a fair, accurate and compliant reimbursement specific to the costs that come from driving a vehicle in their location. FAVR takes into account costs that vary month over month, like fuel, oil and tire wear, as well as consistent costs, like license and registration fees. It also eliminates FICA tax burdens for both the company and the employee, making it an ideal solution to address the issues that exist in other vehicle reimbursement programs.
In a time of unpredictable gas prices and uncertain economic conditions, the last thing employers need is out of control fuel spend and increased tax waste. Pairing a car allowance and fuel card is only fueling the fire of uncontrolled spend. Fortunately, vehicle programs don’t have to be a source of uncontrollable spend or tax waste. Want to know what switching programs looks like? Find out in our guide, Transitioning Out of a Car Allowance Program.
With Motus, accurately capturing business mileage has never been faster or easier.
Contact us today or take a virtual tour of the Motus Platform.
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