If you’re an employer looking to boost employee satisfaction and retention, consider giving a car allowance. Often, these are the easiest, most cost-effective ways to reimburse employees’ vehicle expenses.
However, it’s important to remember that these systems’ simplicity comes with a cost. They must be designed to keep up with the expense needs of today’s work environment. The removal of the tax deduction for business mileage exacerbates this.
What Makes an Allowance Taxable?
Many types of benefits can be taxable to your employees. These include meals, fitness stipends, and more. Understanding the tax laws surrounding these types of perks can help you avoid tax liability for your company.
The agencies define taxable benefits as “an economic advantage that can be measured in money.” This includes things like social club memberships, gym memberships, and more. However, some exceptions to this rule may make your benefits non-taxable to your employees.
A car allowance is one of the most common ways companies compensate their mobile workers. These stipends typically cover travel expenses like gas, maintenance, and repairs. They are often paid on a monthly, quarterly, or yearly basis.
This type of program is ideal for companies with many mobile employees because it’s easy to implement and upkeep. It also allows for predictable costs and a more consistent employee experience.
But it isn’t without its drawbacks. The biggest one is that the IRS considers car allowances taxable income.
To keep a vehicle allowance a tax-free benefit, you must track your mileage and maintain receipts of your fuel and maintenance expenses. A mileage tracker app like MileIQ or other tools can help you meet this requirement.
What Is a Non-Taxable Allowance?
While vehicle reimbursement programs are a great way to help mobile employees cover their work-related expenses, the taxability of these plans can be a big question. If the program is not implemented correctly, it can be considered taxable income at both the federal and state levels, which can significantly reduce employees’ take-home pay.
Fortunately, there is another option for addressing this issue. By implementing accounting procedures and setting up a non-taxable car allowance program, you can save both your company’s and your employee’s money.
In this case, your employees will receive a set amount each month to reimburse them for using their vehicle for business purposes. Whether they drive their truck or one leased, this allowance can cover all the costs of running their car, including maintenance and fuel.
To ensure this program remains non-taxable, you need to substantiate your employee’s usage of their car for business purposes. This means keeping a log of all the miles they drive on company time and using the IRS standard mileage rate to calculate the deductions.
The problem with these programs is that they can incentivize employees to drive fewer miles than they really should. This can be a significant drain on your company’s productivity, and it can also increase employee turnover.
For this reason, it is essential to review your current vehicle reimbursement policy and make sure it meets both your employees’ needs and your company’s requirements. This way, you can prevent your car allowance from becoming a reason for your employees to leave your company or seek employment elsewhere.
It’s also worth considering how the tax reform changes affect your employees. As we mentioned earlier, the IRS eliminated a valuable tax deduction that helped balance out the taxable income employees received from their car allowances.
However, that change doesn’t mean your employees can still benefit from this program. Instead of a standard mileage rate, you can implement a FAVR or cost-per-mile calculation.
This method is often used when a fixed-rate car allowance plan needs to cover your employees’ driving-related expenses adequately. It also ensures employees don’t lose money by paying FICA and Medicare taxes on their car allowances.
What Is a Taxable Allowance?
A taxable allowance is an extra payment you make to your employees in addition to their regular salary. It provides them additional financial support and can be a significant tax saver for you. However, you need to be careful when you offer this type of benefit, as it can be a source of unexpected costs.
In most cases, a taxable allowance is fully taxable (that is, it adds to your employee’s income and has to be included on their T4 slip). However, there are some exceptions.
For example, some traveling and accommodation allowances are exempt from tax if provided under an HMRC agreement. They also don’t have to be shown on a T4 slip when paying them under this agreement.
You can also give your employees a non-cash gift or award, such as a car allowance, that is not taxable. This is because the CRA has an administrative policy that exempts most grants and awards from taxes.
Similarly, the value of any housing benefit you provide to your employees is usually not taxable if they occupy the accommodation for at least one month. If you want to ensure that this benefit is not a source of taxable income, you should reduce its value to meet the reasonable cost of your employee’s needs.
Other non-taxable benefits include disability-related expenses, such as transport to the doctor or hospital, and help with adaptations to the employee’s home or car. Some education-related benefits, such as scholarships and bursaries, are also exempt from taxes.
A fully exempt allowance is an additional amount of money you pay your employees in addition to their regular salary that does not have to be included on their T4 slip. It can cover expenses unrelated to the employer’s business, such as childcare vouchers.
It can also be used for non-work related expenses, such as gym memberships or a company vehicle for personal use. If you’re using this allowance for tax savings, the total amount can be claimed on your employee’s T4 slip.
