At first glance, this might seem like a unique situation. But employees sometimes get asked to use their personal vehicles to run errands or drop stuff off at another location all the time. Today’s reader note is about how employees should be paid for mileage.
I live in Florida and am a construction superintendent. Part of my job involves traveling between job sites to pick up/drop off supplies as needed. I use my personal vehicle to do this. I pay all the expenses: gas, tires, maintenance, and insurance.
The company puts business magnets on my truck. Over the years, I’ve told the company that I’m using a lot of gas. So, they will occasionally throw me a credit card for a tank of gas and then talk down to me saying that I don’t know how to manage my money. To better keep track of my expenses, I recently downloaded a mileage app on my phone. I discovered that I’ve been driving an average of 245 business miles/week on my truck. When I showed the company, they changed my pay stub to include a $56 allowance/week for fuel, which is being taxed as part of my income. This doesn’t come anywhere near what I actually spend!
There is no policy in the employee handbook regarding travel. The other employees stay on one job site and don’t travel as much as I do. Do I have any rights?
I’ve mentioned before that it can be difficult to directly answer reader questions. But this note does prompt a lot of good questions about auto allowances. To help us understand more, I asked Chad Raymond, vice president of HR at Paycom, to share his experience. Chad has over 19 years of experience in employee engagement, benefits administration, and government compliance. He’s worked in several different capacities within Paycom including leading their product development team and HCM initiatives. He also served as the director of Paycom’s service department.
Oh, one more thing. I know you guys know this but please remember that Chad can’t possibly cover every contingency in this article. The information we’re covering is for general informational purposes only and does not constitute legal advice, tax advice, accounting services, or professional consulting of any kind. It’s always a good idea to discuss specific detailed situations related to this matter with your friendly professional tax, accounting, legal or other professional services consultant.
Chad, let’s start by sharing what a written auto allowance policy might look like.
[Raymond] Having a written policy about auto allowance and reimbursements can benefit employers and employees, and an ‘accountable plan’ can help reduce tax liability on both ends.
An accountable plan is a written policy that allows reimbursements to not be counted as an employee’s taxable income. Timely reimbursement interactions help the Internal Revenue Service (IRS) determine that a reimbursement is under an accountable plan and potentially not taxable.
Setting a written policy outlining those timeliness requirements can ensure most of your reimbursement interactions would occur within the accountable plan timelines, and the IRS would be able to count them as not taxable income. Utilizing an expense management system can make this process smoother for both employees and employers.
Let’s get granular. Specifically, what does an auto allowance cover, and is it taxable income?
[Raymond] An auto allowance is the repayment of expenses incurred by an employee while using a personal vehicle for work purposes. Whether that income is taxed or not depends on certain criteria.
Section 61 of the Internal Revenue Code (IRC) defines gross income as all income, no matter where it came from. Section 62(a) defines adjusted gross income as the income of Section 61, minus certain deductions. Section 62(a)(2)(A) notes that an employee may deduct certain business expenses they have made during the course of their work under a reimbursement or other expense allowance arrangement when determining adjusted gross income.
If a reimbursement meets the requirements of business connection, substantiation, and returning excess reimbursements, all reimbursements would fall under the accountable plan and may not be taxable income. Section 62(c) states that income will not be treated as a reimbursement (or under another expense allowance arrangement) if (1) the arrangement doesn’t require the employee to substantiate their expenses, or (2) the arrangement allows the employee to keep any reimbursement that exceeds the amount of the substantiated expenses.
Reimbursements that do not meet the accountable plan’s requirements will be considered under a non-accountable plan. Reimbursements under a non-accountable plan will be considered taxable income.
What are the pros and cons of auto allowances – for the company and the employee?
[Raymond] An auto allowance policy that ensures reimbursements fall under an accountable plan can benefit employees and employers.
Reimbursements that fall under an accountable plan do not count toward an employee’s gross income. That income is exempt from withholding and payment of employment taxes, and is not reported on the employee’s W-2. The employee receives a lower taxable income, which reduces his or her adjusted gross income, affecting the 2 percent deduction floor.
An employer will not be liable to pay employment taxes on those reimbursements, as long as they fit the accountable plan requirements.
The drawback to having an accountable plan is the manual processing required by the employee and employer to ensure that reimbursements fit the criteria.
If an employee feels their auto allowance isn’t sufficient, is there something they can do?
[Raymond] Yes, if an employee is spending more than the employer will reimburse, the employee should retain any relevant records as part of their tax records and can then claim credit for those unreimbursed expenses by filing Form 2106 (Employee Business Expenses). A mileage tracking app can help ensure accurate and efficient record-keeping.
I want to extend a huge thanks to Chad and our friends at Paycom for helping us with this article. As you can see from Chad’s comments, what might seem like a simple employee benefit can be very complex. Both for the organization and the employee.
Asking an employee to run a quick errand or drop off something at another location might not seem like a big deal at the time. And employees might be very willing to do it. But it can quickly become a gripe if it’s abused OR if it’s not compensated properly. Organizations need to do their homework and make sure employees are being paid for the work they do and reimbursed for the expenses they incur.
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