If your employees commute to work using their own vehicles you may need to consider an allowance policy. A car allowance policy is when an employer gives a certain amount of money to the employee for using their car as part of their job.

This amount is usually negotiated and is the same for all employees no matter the distance .A car allowance is usually very simple to maintain compared to the company providing the vehicle. However it has an adverse effect on the return on investment.

Rules Your Car Allowance Policy Should Have

Your car allowance policy should be aligned to your business needs .You could calculate how much your staff drives back and forth from work so you could decide on a fixed amount to give them. You could calculate by using standard mileage rate. You could also ask some of your trusted colleagues to fill you in on the going rate. Do not forget to tweak the amount every year due to inflation.

Downside

Reasons why most business prefer car allowance policy is due to its simplicity. You decide on the amount your employee uses for their car then you add that to their payroll. However, just like two coins this too has a flip side.

  • Taxes; A car allowance policy could increase an employees’ income tax figure. Since it is seen as part of the income.
  • Inefficient: A car allowance policy has a tendency to be worth up to thousands of dollars. Since there is a flat rate for this policy you do not know whether their value you are getting in return is worth it or not.
  • Poor incentives: This may give bad incentives to employees. They may want to drive as little as possible but still get their usual flat rate allowance.

Car Allowance vs. Mileage Reimbursement

Mileage reimbursement is when an employer repays employees for the cost of using their car to commute to work. This ensures you are not wasting money. For instance in a car allowance policy if you give your employees $400 a month how sure are you they need this exact amount, or what about your employee that drove more miles?

With mileage reimbursement you give your employees the exact amount they use. This is a win-win situation for you and your employees.