Company Car vs Car Allowance: Which is Better for Your Business?
Businesses that operate fleet vehicles have a decision to make: reimburse employees for the use of their personal vehicles or provide them with company vehicles.
There is a commonly held belief that mileage reimbursement or car allowance programs are more cost-effective and easier to administer. In reality, these programs often cost you more than providing company vehicles and can harm employee productivity and morale.
In this blog, we will examine the factors you should review when considering a company car versus a car allowance or mileage reimbursement for your employees.
How Does Reimbursement Work?
Under a reimbursement or allowance model, your company typically decides on a reimbursement rate per mile or per month for employee travel. Companies often use a fixed mileage rate, a monthly rate, or a combination of a fixed monthly allowance with mileage reimbursement.
Reimbursement rates vary but most companies typically follow the annual IRS Mileage Reimbursement Guideline. In 2022 the IRS published a rate of 58.5 cents per mile. If you do not provide company vehicles, each employee is responsible for keeping their vehicle properly insured, maintained, and registered for business use. The car allowance can be taxable as income to the employee.
Reimbursement is typically a low mileage solution and can be cost-effective if your employees travel less than 10,000 miles a year. But for businesses that require employees to travel more frequently, a company vehicle makes more sense economically.
Comparing Reimberusement Programs to Company Owned Vehicles
1. Vehicle Acquisition and Service Costs
Mileage reimbursement and allowances typically cost businesses more than providing company cars. Businesses that adhere to the IRS guidelines pay on average 15% - 20% more for reimbursement for employees traveling more than 10,000 business miles per year.
Under a company vehicle program, businesses can take advantage of fleet management services and acquire vehicles at a much lower cost. Additionally, lease payments are treated as an expense and can be written off.
Providing company vehicles also allows businesses to gain more control of operating expenses with fuel and maintenance.
2. Recruitment and Retention
Offering company vehicles is a competitive edge for hiring and retaining talent. A company-provided vehicle can be a recruiting tool and company benefit. It also allows you to open up job postings to candidates that do not own a vehicle, or that do not want to put excess mileage on their personal car.
3. Company Image
Under most car allowance or reimbursement programs, you don’t have control of the vehicles your employees are driving. With a company car program, you can ensure employees arrive at meetings and job sites in vehicles that present a professional and competent image. You can also upfit company vehicles with graphics or branding, something most employees would not agree to on their own personal vehicle.
4. Administration and Productivity
With vehicle reimbursement, there is a perceived ease of administration, but in reality, this isn’t always the case. In fact, reimbursement often ends up taking more time tracking mileage, chasing down receipts, and verifying expenses while costing your organization more in travel expenses.
Reimbursement programs can also impact how your employees maintain their vehicles. When they are responsible for scheduling and paying the upfront cost of maintenance, they may be tempted to delay or skip service. This can lead to breakdowns, increased wear and tear, downtime, and even unnecessary rental costs.
5. Safety and Liability
Both reimbursement and company car programs can expose businesses to liability risk. If an employee gets into an accident driving a company-provided vehicle on personal time, your business may be liable. And if an employee fails to obtain proper insurance for their personal vehicle and gets into an accident while using the vehicle for work, your business could also share in the liability risk. Additionally, if for some reason an employee allows their insurance to lapse, your company is potentially again exposed.
However, this liability may be easier to mitigate with company-provided vehicles because your business will have control over the safety features included in the vehicles, the vehicle insurance, proper vehicle upkeep, and driver safety training initiatives.
It’s much more challenging to keep track of each employee’s insurance on their personal vehicles, and few programs exist today that make this easier.
How to Switch From a Reimbursement Program to Company Provided Vehicles
At Ewald Fleet Solutions, we offer a comprehensive vehicle analysis to clients considering moving to a company car program. We begin by comparing the costs of providing company vehicles to what you are currently spending on your reimbursement program. Our clients are often surprised to discover how much they’ve been overspending on their vehicle reimbursement programs.
We’ll then help you roll out the program to employees with a complete onboarding template. We’ll also set you up with a platform to manage fuel and maintenance costs and track employee mileage.
There can be a tax implication if your employees use a company car for personal use, and we have a Personal Mileage Reporting program to monitor personal mileage on company vehicles. Personal mileage is a taxable fringe benefit for the employee, and we use this program to determine what the benefit is.
For the majority of businesses, a company car program is the best option. Compared to a reimbursement program, it can control risk and liability, provide control over company image, reduce costs, and boost productivity. Don't hesitate to reach out to us at Ewald Fleet Solutions with any questions about providing company cars to employees.
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