Expense policy

A guide to creating an effective car allowance policy

January 9, 2020
|
3
Min Read

One primary concern among small business owners is whether or not a car allowance will be a suitable model for their company. 

In its simplest form, the answer is: Yes, it would be an excellent fit for even a small business.

In today's modern business world, there are more and more remote workers and traveling employees than ever before. What was once an "honor system" style of traditional reimbursement has now become regulated.

Your business can offer an incredible service to your employees by giving them a fair balance for their efforts. They work hard for you and drive several different places to meet with your clients. They should be rewarded for the hustle. 

A car allowance policy is a perfect balance of offering your employees a reasonable return for their expenses while also collaborating with the IRS rate for a tax return. In this article, we discuss the need for a car allowance policy. Additionally, we help you with all the information needed to craft an effective car allowance policy. Let's dive in!

SUGGESTED READ:

How can expense policy compliance benefit your business?

What should a car allowance policy cover?

  Use these pointers to figure out what needs to be included in your car allowance policy:

  • What should a company reimburse or not? (The answer depends on your company.)
  • What types of expenses do your employees need to be covered with? 
  • What are the demands of your industry? 

There are certain avenues that a business can take to protect both their finances as well as their employees' finances. While the statement may seem counterproductive, in some instances such as new tax laws, both sides can equally benefit from you making a change. Here's how to best incorporate this into your business to make sure everyone's on the same page.

Consider the taxes under a car allowance policy

One of the biggest reasons you should consider a new car allowance policy is for tax purposes. Only specific car allowance policies are taxable, so be sure to understand the basis of each.

  1. Essentially, when a determined monthly amount of car allowance is paid to your employees, it becomes taxable. This helps give your employees an option when it comes to paying their taxes under new tax laws.
  2. Be diligent with this, as specific IRS mileage rates will create a cap for your car allowance policy to only pay back an employee a certain amount that they drove. Because of that, you risk your employees not being reimbursed for several hundred miles that they drive on behalf of your business.
  3. Do your best to communicate this with your employees at the start of every year. Help them grasp a firm understanding of the tax laws and how your new car allowance policy is doing its best to help compensate them.

Set the mileage rate in your car allowance policy 

As previously mentioned, there is only a certain amount that the IRS will cap your allowance at, which for 2020 is 57.5 cents. Pair this with the fact that some states also regulate the reimbursement amount for your employee's work-related expenses such as transportation.

  1. The amount that your company should cover for its employees is entirely dependent on what their job requires of them. If your company doesn't need its employees to venture out much on work-related drives, then the amount for your allowance won't be too high.
  2. Make sure you aren't building a program some troublemaking employees can take advantage of. Only create a car allowance amount that you feel is generous to your worker's drive. If you're not sure where to start, don't worry. Read more about our mileage tracker that can help you oversee the necessary amount.
  3. Without the proper knowledge, it can be challenging to understand the different standards you need to meet. Set yourself up with a trusted expense management system to make sure your new policies are communicated from top-down.

SUGGESTED READS:

Policy considerations for mileage reimbursement

Your guide to 2020 IRS mileage rate

Seek automated policy enforcement

The most crucial aspect of implementing a new car allowance policy is the effective communication of this policy to your employees. It is vital that they fully understand the new policy and all its features. An easy way of doing so is by adopting an automated expense management software. 

An automation system simplifies the process for your finance teams and employees. It also fastens the turnaround time, while eliminating all the frustrating experiences around expense reporting and reimbursements. Also, all of the policies that your company installs will be integrated into the system. This helps avoid any errors by the employee while filing the reimbursement in-line with your new car allowance policy.

Pro-tip: Be sure to check out this article on policy considerations for mileage reimbursement. Here you'll find a few more helpful pointers on the expenses that are available for reimbursement under the current tax laws.

Install a car allowance policy for your employees 

Now that you're aware of the guidelines for building a successful car allowance policy for your business, it's time to find a system that will help you keep up with it.

While manual and traditional methods may help you barely squabble through the process, an automated solution can be a permanent fix. An automated expense management solution will not only help craft effective policies but will also enable its active deployment, from the backend. Additionally, it also ensures policy compliance with automatic flagging of policy violations, the setting of custom reminders and more. 

Fyle can help put an end to all your pre-accounting and accounting challenges. Schedule a quick demo today to understand how!

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