Need help with Car Allowance/Reimbursement Policy
jerzal
34 Posts
We are a small co and want to give a car allowance to one employee. However it seems according to the IRS we cannot do it and must either reimburse for actual costs or a mileage allowance.
This is what I found out on the SHRM site:
How much can we reimburse employees for using their own cars on company business?
The Internal Revenue Service gives employers three ways to provide tax-exempt reimbursements for employees' business use of their personal vehicles: an actual cost method, a standard mileage rate, and a fixed and variable rate allowance. Most employers can use either the actual cost or standard mileage rate methods, but restrictions apply to the use of FAVR allowances.
Actual cost method. An employer can reimburse employees for the actual costs of any business use of their personal cars, provided they supply receipts, logs, or expense sheets documenting the time, place, and business purpose of the expense. To qualify as tax-exempt, allowances or reimbursements must be made under an accountable plan that covers only substantiated business expenses, separates expense payments from other wage payments, and requires any unused advances or allowances to be returned to the employer within a set period of time.
Standard mileage rate. This method provides a fixed, per-mile payment to compensate employees for business use of their own cars. In 2005, the standard mileage rate is 40.5 cents (37.5 cents in 2004) for each business mile driven. This rate, which is adjusted annually for inflation, covers both fixed costs—such as insurance, registration, and license fees—and variable costs—such as fuel, oil, maintenance, and repair fees—associated with business use of a car. However, it does not include parking fees or tolls, which employers can reimburse separately. For payments to qualify as tax-exempt, employees must document their mileage, including the time, place, and business purpose of the vehicle use, but no other receipts are required. This reimbursement method can be used only for qualified nonluxury cars.
Fixed and variable rate allowance. The FAVR allowance consists of a periodic flat-rate payment intended to cover the fixed costs, and a variable payment intended to cover the operating costs of using a personal vehicle for business purposes. Both fixed and variable FAVR allowances must be paid at least quarterly. Parking fees and tolls are not covered by the allowance, so employers can reimburse these expenses separately.
The FAVR method can be used only for employees whose business use of their personal cars accounts for less than 75 percent of all annual mileage, but exceeds 6,250 miles per year. Employers also cannot use this method unless at least five employees are receiving one or more FAVR allowances throughout a calendar year. In addition, employers must ensure that management employees account for a minority of employees receiving FAVR allowances and exclude control employees—that is, certain highly paid or placed employees—from receiving these allowances.
We were going to use the FAVR until I saw this:
Employers also cannot use this method unless at least five employees are receiving one or more FAVR allowances throughout a calendar year.
I am new to this, so if anyone can provide any insight, I would greatly appreciate it. Does this all sound right to you? Thanks!
This is what I found out on the SHRM site:
How much can we reimburse employees for using their own cars on company business?
The Internal Revenue Service gives employers three ways to provide tax-exempt reimbursements for employees' business use of their personal vehicles: an actual cost method, a standard mileage rate, and a fixed and variable rate allowance. Most employers can use either the actual cost or standard mileage rate methods, but restrictions apply to the use of FAVR allowances.
Actual cost method. An employer can reimburse employees for the actual costs of any business use of their personal cars, provided they supply receipts, logs, or expense sheets documenting the time, place, and business purpose of the expense. To qualify as tax-exempt, allowances or reimbursements must be made under an accountable plan that covers only substantiated business expenses, separates expense payments from other wage payments, and requires any unused advances or allowances to be returned to the employer within a set period of time.
Standard mileage rate. This method provides a fixed, per-mile payment to compensate employees for business use of their own cars. In 2005, the standard mileage rate is 40.5 cents (37.5 cents in 2004) for each business mile driven. This rate, which is adjusted annually for inflation, covers both fixed costs—such as insurance, registration, and license fees—and variable costs—such as fuel, oil, maintenance, and repair fees—associated with business use of a car. However, it does not include parking fees or tolls, which employers can reimburse separately. For payments to qualify as tax-exempt, employees must document their mileage, including the time, place, and business purpose of the vehicle use, but no other receipts are required. This reimbursement method can be used only for qualified nonluxury cars.
Fixed and variable rate allowance. The FAVR allowance consists of a periodic flat-rate payment intended to cover the fixed costs, and a variable payment intended to cover the operating costs of using a personal vehicle for business purposes. Both fixed and variable FAVR allowances must be paid at least quarterly. Parking fees and tolls are not covered by the allowance, so employers can reimburse these expenses separately.
The FAVR method can be used only for employees whose business use of their personal cars accounts for less than 75 percent of all annual mileage, but exceeds 6,250 miles per year. Employers also cannot use this method unless at least five employees are receiving one or more FAVR allowances throughout a calendar year. In addition, employers must ensure that management employees account for a minority of employees receiving FAVR allowances and exclude control employees—that is, certain highly paid or placed employees—from receiving these allowances.
We were going to use the FAVR until I saw this:
Employers also cannot use this method unless at least five employees are receiving one or more FAVR allowances throughout a calendar year.
I am new to this, so if anyone can provide any insight, I would greatly appreciate it. Does this all sound right to you? Thanks!
Comments
Car allowances are used all the time in business - but they are usually taxable to the EE. The EE can offset the tax consequences to the extent he/she can document business expenses, which can be deducted right on his/her 1040.
Otherwise, use one of the three methods in your post - which are basically reimbursements for business use of personal auto.
We are considering paying vehicle allowances to 6 people instead of reimbursing for mileage. They do not have one work site: they are field employees who travel from school to school, using their personal vehicles. We've been reimbursing $200-$500/month for mileage.
We would not qualify for the FAVR allowance, so we would need to tax the allowance, which is fine.
On the IRS site, I was only able to find resources for an individual to write off the business use expense, nothing for the employer's reference.
My questions;
- can anyone share an existing policy that addresses some or all of our concerns, so I do not need to reinvent the wheel?
- for tax purposes, I will figure out how to set up the appropriate paycode in our inhouse payroll system, but do cafeteria plans and 401k plans apply to this type of payment in payroll? I believe the plans only apply to compensation, not to taxable business expense reimbursements but just do not know for sure.
- are there any guidelines you give your employees in this situation, to help them make the most of their tax write offs? Some of our managers will have no idea what to do, and I will at least refer them to IRS.gov.
- those of you who do pay taxable business expense reimbursements, can you think of anything else I might need to know, that I haven't asked?
Thank you for whatever help you can give!
OK, here's what I came up with, blessed by a local HR council. They suggested a memorandum of agreement instead of a policy.
"To: (name)
From: Your favorite HR Queen
Date: 12/19/07
Subject: Vehicle Allowance
In lieu of reimbursing for mileage, effective (date) you will be provided with a flat sum "car allowance" that is established by the company, based on the anticipated number of miles you are required to drive for the job. The allowance is subject to change at management's discretion, and any changes will be announced in advance whenever practical. Management reserves the right to alleviate or change the car allowance for any reason.
Your final Mileage Reimbursement report should be submitted no later than (date.) Your monthly Vehicle Allowance will be (amount) to be paid on the second pay date of each month, beginning (pay date.) This amount will be added to your regular paycheck and will be treated as taxable income.
Time off from work will affect the amount of the Vehicle Allowance. For example, if you are not required to drive your vehicle due to vacation, leave of absence, etc., the Vehicle Allowance will be prorated based on the actual number of days you were required to drive for work purposes. Vehicle Allowance will also be prorated when you separate employment, and will based on actual time spent driving on behalf of the company.
Employee Signature Date"
Edit: I also learned that the vehicle allowance is taxable as income, so it would be affected by cafeteria plans, 401k, etc.
1. We offer a car allowance and do not prorate it for vacation days. The allowance covers general use, maintenance, service etc for an employee using their own vehicle for company business over the course of a year. To prorate it for vacation days doesn't seem to make sense to me.
2. Our car allowance is income that's eligible for our 401(k) plan but not pension. This will depend on your plan's definition of eligible compensation.
3. Related to #1 above, this car allowance does not replace mileage reimbursement (the .40 or whatever cents per mile you reimburse for driving to a specific location). Instead, it supplements and provides money to help employee defray costs associated with using car for company business.
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Sharon