HR leaders: does your team treat car allowances as extra income?
Car allowance

HR leaders: does your team treat car allowances as extra income?

It is a common mistake for employees to view car allowances as extra income. That's why HR leaders should implement systems to educate employees.

November 28, 2022

Lindsay Clayborne
Lindsay Clayborne

Employees sometimes treat car allowances as extra income. This is often the case on traditional, in-house car allowance programs. It is challenging—when you receive an extra $600 dollars per month with your paycheck—to differentiate between income and an expense allowance.

This is an understandable mistake, but one with potentially serious consequences. Owning and operating a vehicle is expensive. When employees drive their personal car for work, they are often putting a lot of mileage on their vehicles. More miles means more expenses, and even when employers give employees car allowances to cover all attendant costs, it is easy for employees to get blinded by the extra dollars, and spend them on unrelated items.

It is important for HR leaders to deploy systems and education to help employees use their car allowances wisely. This blog post is a great place to start for understanding said education component; shortly, I will dive into the system HR can deploy to improve employee outcomes where car allowances are concerned.

When allowances run out, engines stop running.

If an employee spends their car allowance on stuff other than their vehicle expenses, two things can happen.

The first is that they may not have the money available to pay for vehicle costs that arise. If a car allowance has been expended elsewhere, but then a fuel pump needs replacing, funds may not be available for the repair. This could very well put the car out of service, leading to a significant drop in productivity. An employee could be in the unfortunate position of having to dip into their savings to pay for the repair—or simply wait til their next paycheck and allowance are delivered to afford the new pump.

The second is that, even if an employee’s car is fully functional, an expended allowance could disincentivize driving. Imagine depleting your car allowance and then setting out for 500 miles of driving in a week. That could cost $100 in gas alone, depending on your state. Where will that money come from if not from the allowance? If a rep is—as they may see it in this situation—stuck footing the bill for their sales calls, they may try to find ways of not driving. Perhaps they will take important meetings over the phone instead of in person, leading to poorer sales outcomes.

You want your vehicle program to be behavior-neutral; to neither incentivize nor disincentivize driving. Unfortunately, without the right systems and education, an employee may unwisely spend their allowance, leaving nothing left over for their actual work expenses.

What employees must be shown is that their car is a tool that they use for work. HR leaders can help them come to this understanding. The best way to do this is by formalizing your car allowance program, and reconceiving it as a “vehicle reimbursement program.”

What is the difference between a vehicle reimbursement program and a car allowance?

In effect, a vehicle reimbursement program is simply a tax-free car allowance. Car allowances, when the expenses are not properly documented or accounted for, are taxed by the IRS at the relevant employee’s personal income tax rate. A vehicle reimbursement program is a tax-free program that allows employees to drive their personal vehicles for work.

Vehicle reimbursement programs are also tools HR leaders can use to educate employees about the benefits of economical vehicle ownership. The right vehicle reimbursement program encourages thrift because drivers are consistently engaging with their vehicles as tools for work. A smart vehicle program has many touchpoints where drivers are interacting with vehicle expenses.

Take, for example, a Fixed and Variable Rate (“FAVR”) program, in which drivers are reimbursed separately for fixed (e.g. insurance) and variable (e.g. gas) driving expenses. Employees have to log their mileage, either with software or paper mileage logs, forcing them to think about how and how often they are using their vehicles. They have to meet certain compliance measures to stay on the program, like driving 5,000 miles per year. These interactions with their vehicle as a work tool reinforces the notion that it is a tool they use for work, and therefore their reimbursement should be allocated specifically for the maintenance of this tool.

We even find that switching terms—from “allowance” to “reimbursement”—can be helpful in changing the way drivers think about their vehicle expenses. An allowance sounds like money that you can spend at your discretion; a reimbursement sounds like a repayment for money that you have already spent on necessities.

Moreover, an outsourced reimbursement program like Cardata’s will feature a payment that is distinct and separate from an employee’s paycheck, meaning that the money is seen differently by the employee.

These subtle but important shifts in thinking can lead to much greater employee satisfaction and business outcomes.

Smart vehicle programs teach employees how to understand their car allowance

Outsourcing a FAVR program to a company like Cardata has other benefits, namely software, to help employees understand their driving expenditures.

A Cardata Fixed and Variable Rate (“FAVR”) reimbursement program is bolstered by a mileage tracking app and an online dashboard where employees can see in greater detail what they are being reimbursed for. They have data—insights into the driving patterns and routes, into their adaptive variable rate reimbursements that keep up with fuel prices.

Having a structured program, rich with data, can help drivers compartmentalize their driving expenses.

The value of their allowance is greater with FAVR

Besides the clarity and compartmentalization imparted by FAVR programs, there is this additional benefit: FAVR programs pay 30% more than flat rate car allowances, when the latter is unaccountable.

FAVR is an IRS-compliant program that lets drivers receive their reimbursements completely tax free. So, once you have implemented a FAVR program, not only are drivers more careful with their spending, but they also have more to spend. A $700 flat rate allowance could immediately be transformed into a $1,000 reimbursement.

Conclusion

It is important to discuss fiscal responsibility with your team. Drivers need to understand how to separate the expenses they necessarily incur while discharging their duties from their other living expenses.

But implementing a robust vehicle reimbursement program can help them understand driving expenses—through access to data on their driving habits and fuel prices, for example.

Plus, if your company currently offers a flat rate car allowance, you can put 30% back in your drivers’ pockets immediately by switching to an IRS-compliant FAVR program.

Interested in learning more?

Book a demo