For employees who drive their personal vehicles for their jobs, their employers have two options: they can either provide some incentive in return for this personal sacrifice or not. For the employers that understand the benefits of providing an incentive, they can either provide a reimbursement for miles traveled or a flat-rate car allowance.
Having a mileage reimbursement or car allowance program for employees is not mandated by the federal government, but it is a smart choice for your business. Having one of these at your workplace will help attract and keep good employees. The question is not if you should compensate your employees in some way for use of their personal vehicles, but how you should do it. In a debate between mileage reimbursement vs car allowance, which is better?
Mileage Reimbursement Vs Car Allowance: Know the Difference
A car allowance is a set amount that you give to your employees to cover a period of time. This car allowance is intended to cover typical costs of owning a vehicle, such as maintenance, wear-and-tear, insurance, fuel and depreciation. Because it is a set amount, factors such as distance traveled for work do not change the amount from month to month. It is the same for all employees.
A mileage reimbursement is payment in return for distance traveled at a set mileage rate. This method requires that employees fill out expense reports must be approved for a reimbursement to be issued. A reimbursement is intended to cover expenses similar to a car allowance, and the standard mileage rate set each year by the IRS is determined by a national average of these expenses. Unlike a car allowance, mileage reimbursements are dependent on how much an employee travels and are different for everybody at a company.
Even knowing the difference, the choice between the two options can seem daunting. When debating between a mileage reimbursement vs car allowance program, the choice you make has huge repercussions for your business, and you should take the time to properly understand the differences.
The Advantage of a Car Allowance
The main advantage of a car allowance – and the reason some businesses choose this route – is its simplicity. It takes very little infrastructure to institute a car allowance for your employees. Once you’ve chosen how much the car allowance will be and how often your employees will receive it, all it takes is some simple bookkeeping and the system is up and running.
It’s also simple to maintain. With a car allowance, employees never need to track their car usage for work and supervisors will never need to approve and maintain these reports.
The Problems With A Car Allowance
The simplicity of implementing a car allowance at your company comes at a cost. Just setting the amount of the allowance is difficult. How do you know how much to give your employees that will be right for all of them? Determining this amount is not an exact science, and when you don’t get it right, it can result in you alienating more of your employees than satisfying them.
No two employees travel the same distance each month, which means that no matter where you set the amount for your allowance, you’re bound to underpay some employees and overpay others. If you set the allowance too high, then you’re ultimately losing money by paying employees for travel they never took. There are also outside forces you have to consider such as fuel prices and car insurance. The prices of these necessities vary from region to region and may affect some employees more than others.
When tax season comes around, opting to use a car allowance will cost you more money, too. The IRS sees car allowances as a form of compensation whether than a reimbursement for travel. Therefore, any money you paid to your employees as a car allowance is taxable just like wages.
|Federal Income Tax||$807.02|
|Social Security Tax||$169.47|
|Social Security Tax||$250.17|
|Total Taxes per Employee||$1343.68|
|What if you have 100 employees?||$134,367.50|
For employees, this also means they receive less of the allowance in the end. After taxes, a car allowance is reduced by 30-40%, so even if the amount before taxes was enough to sufficiently cover expenses, the amount after taxes may not be.
The Clear Winner: Mileage Reimbursement
Reimbursing employees for miles traveled is much more accurate than simply issuing a flat-rate car allowance. By reimbursing for only what they’ve traveled, employers are neither wasting money by overpaying nor shirking responsibility to their employees by giving too little an allowance. Mileage reimbursement is a much fairer system, as well. Employees who travel more and cover more territory will be reimbursed for a higher amount, incentivizing them to travel more for work.
Mileage reimbursement, unlike a car allowance, won’t come back to haunt you during tax season, either. As long as your business follows an accountable plan and can prove that your employees traveled the miles you have reimbursed them for, mileage reimbursement will not be treated as taxable income by the IRS. That means you get to take a deduction on your taxes.
Be Smart With Mileage Reimbursement Software
In the debate between mileage reimbursement vs car allowance, reimbursements are the clear winner. So, why is it still a debate at all? Because many businesses aren’t sure how to implement a program correctly that will meet the needs of their business and employees.
By using an expense management platform such as SureMileage by CompanyMileage, the entire mileage reimbursement process becomes streamlined and easy to complete. One of the most difficult parts of fulfilling reimbursements under an accountable plan is having employees maintain a mileage log. Logs are typically time consuming and inaccurate, costing the business money. With SureMileage’s trip calculator, employees simply put in their starting point and trip destination, and our system supplies the mileage for their travel. Customized address books make the process easy to complete.
SureMileage also integrates with all major accounting and payroll systems. When employees are ready, they can generate their trip data in an expense report and submit it for approval. The approval process for reimbursements can be tailored to meet the needs of your business, and with the addition of automation into the system, the time from submitting an expense report to issuing a mileage reimbursement is shorter and simpler than other traditional methods.
For employees and employers alike, there is no contest between a mileage reimbursement vs car allowance. Make implementing your reimbursement program a simple and profitable transaction for your business. Request a demo with CompanyMileage today to learn how we can save you 20-30% on mileage reimbursements today.