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Should Employees Receive an Auto Allowance – Ask #HR Bartender

auto allowance, labor law, laws, compliance, employees, pay, paid, benefit, benefits

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.

Chad Raymond, Paycom, mileage, auto allowance, benefits, pay[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.

P.S. If you’re reading HR Bartender via email or an RSS Reader, I hope you’ll take a moment to click through to our new site. To celebrate nine years of blogging, we wanted to update our look. Thank you for reading, commenting, and sharing HR Bartender. We truly appreciate you. Cheers!

Image captured by Sharlyn Lauby while cruising down Seven Mile Bridge heading to beautiful Key West, FL

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About Mildred Blankson

I am a Human Resource Professional with a Masters Degree in Human Resource Management. I have several years of experience in Human Resources and i hope this blog will be a great resource in helping you find the perfect job or candidate that you seek.

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How to Leverage Company Benefits to Recruit and Retain Top Talent

One-third of organizations have increased their overall benefit offerings in 2016, according to a research report compiled by the Society for Human Resource Management (SHRM). As recruiting and retaining top talent continue to become increasingly difficult for employers, robust benefit packages play a key role. When salaries and perks (think: free lunch) are nearly equal from company to company, employees are likely to opt for the company that offers the best benefits and greatest opportunities.

Medical and financial benefits aside, employees are looking for lifestyle and career benefits. SHRM reported that the top reason employers increased benefits in 2016 was to remain competitive in the marketplace—and the three biggest focus areas for change were in the health (22%), wellness (24%), and professional and career development (16%) categories. Robust benefit packages that include career development, health and wellness, and flexible working options provide a platform for employers to stand out. Nearly one-third of employees look for external positions because they desire “overall better benefits,” second only to higher compensation.

The type of benefits you offer speaks volumes on how you treat and support employees, which always manifests by way of your external employer brand. It’s not enough to say “we have great benefits,” because “great benefits” are now table stakes. Companies have mastered the art of talking about perks, from catered lunches to team building activities. Failure to talk about the real support and development opportunities you offer to employees might translate to missed opportunities. So how can hiring managers and recruiters promote employee benefits to help with recruiting and retention?

#1: Kick “industry standard” out of your vocabulary

When recruiters and hiring managers list their company’s benefits and summarize with the catch-all phrase, we offer “industry standard” benefits, it’s not enough. When all else—compensation, vacation days, and perks—are even, offering a standard benefits package won’t help your company standout enough to secure commitment from a top employee. Even though it might be tempting to default to a quick response, it pays to provide more detail about the benefits your company offers, in length, during the interview process.

And even more importantly than providing a laundry list of benefits (but kudos to you for that list!), explain how these benefits fit in with core company values. For example, if you offer flexible work arrangements and flexible hours, explain that these arrangements support your company’s value of work-life balance. If you provide a gym membership or showers at work, talk about how it enhances company culture or creates opportunities for employees to get the exercise they desire in a convenient way.. When recruits begin to see how your benefits support their shared values and interests, they’ll see the benefits you offer are much greater than “industry standard.”

Employers hoping to keep a competitive edge are offering more than the “industry standard” at every stage of the employee journey, including at severance – according to a recent study by RiseSmart. If you’re on the cutting edge of severance offerings, use those benefits to differentiate your company form the competition.

#2: Talk about goals in the recruiting and interview process

Before an employee is even hired, find out what they’re looking for in their employer and what their short and long term goals are. Ask questions like, “Where do you see yourself in 5 years?” and “How are you hoping your employer will support you along your career journey?” Employees, many of whom are seeking opportunities for career development and continuing education, need to know you plan to invest in their individual career goals.

A Career Builder survey found that 45% of employees, regardless of generation, plan to stay with their employer for less than two years. During their tenure, they expect to benefit and grow with each new role and and at each new company. It’s important to convey to prospective employees that you invest in each individual employee, regardless for how long they plan to stay in the role for which they are being hired.

#3: Amplify the employee voice

Remind employees early on that they have a voice to share about company culture and employee benefits. Glassdoor, for example, recommends employers invite new hires to reflect on their first few months at the company. Whether this leads to internal feedback or a public review, it can assist efforts aimed at creating a positive employer brand.

L’Oréal recently launched a #LifeatLoreal hashtag to encourage employees to share photos of their experiences at work. The campaign all stemmed from the idea that people would trust their peers on social media when it came to L'Oréal being a great place to work. Employees posted a wide variety of pictures, including snapshots of various benefits and perks in action—such as flex days and catered lunches. Encourage employees to share the experiences they enjoy the most on the social channel of their choice.

#4: Keep employees engaged with benefits

On average, salary is only about 70% of an employee’s total compensation. When employees don’t take advantage of the benefits offered by the company, it’s equivalent to leaving 30% of the total compensation package on the table. Employers who keep employees engaged with benefits are more likely to see benefits manifest as part of the employer brand. An employee is highly unlikely to leave a Glassdoor review that mentions a positive benefit if she has never actually utilized the benefit.

Try hosting monthly or quarterly Q&A sessions to discuss available benefits. When you roll out a particularly hefty benefit, such as a new 401K offering, or an update to parental leave policy, give employees ample opportunity to ask questions. You could also share success stories from employees who have taken advantage of a particularly niche benefit, such as an hour of free lawyer services, to showcase how the benefit is used and encourage other employees to check it out.

#5: Benefits are the forgotten negotiation tool

If you are a hiring manager or recruiter engaging with a candidate, think beyond salary, or equity. Everything is negotiable, from vacation days to health insurance choices. Savvy employees, especially as the war for talent continues to heat up, will use benefits as negotiation tools—but don’t shy away from doing the same thing on the employer side. It’s often easier to offer more benefits than to secure additional salary for an employee.

Don’t be afraid to talk about your full complement of benefits, including your severance benefits. Prospective employees may feel more comfortable about joining a company that will take care of them, in the event of a downsizing or restructuring event. You may want to consider offering perks like outplacement and career transition services to employees who leave voluntarily as well as those who are involuntary subjects of a layoff. Knowing that you are invested in their career, even after they leave, will help you create a workforce of dedicated, engaged, and satisfied employees.

The world is small and everyone is connected. When you invest in employees, it leads to a positive employer brand. In the new Employee Relationship Economy, former employees will someday become vendors, customers, brand evangelists, recruiting references, or even boomerang employees. In a world where the employee/employer relationship is no longer finite, it’s important to convey your full support for employees’ career endeavors at every stage of their career journeys -- beginning early in the recruiting and interview process.

In every recruiting conversation, highlight your dedication to each employee’s career. When you frame up your organization’s benefits in context of how they fit in with the employee’s journey, it’s easy for the candidate to see how your company would support his journey. Communication about employee benefits can go a long way in the recruiting process—and will have a direct impact on your employer brand. If you offer much more than “industry standard,” you should be screaming it from the rooftops. Your current and prospective employees deserve to understand just how committed you are to their personal and professional journey.

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