Auto expense wage differentiation

[Openfire]

I have a client that would like to provide an auto allowance to an employee that is doing more and more driving. He would like to pay him $800 per month for a vehicle allowance as a flat fee. The employee also keeps mileage, lodging, etc.. I have told him it must go on the W-2, box 1 as wages. My question: Is there any way to exclude this income from the retirement match, worker's comp basis, or other wage based benefits? Or, does it just really boil down to a wage increase?

[Roland Slugg]

There may be others who can give you a reliable answer to your Q, but I would like to suggest two alternate ways to handle the matter, both of which would be better for both the employee and the employer.

(A) Instead of paying the employee a lump-sum allowance, the company buys or leases the vehicle and allows the employee to use it. The employer pays all the expenses. If the employee pays for certain expenses, such as gas, he submits receipts and is reimburses dollar-for-dollar. If there is a personal use factor, the employee could either reimburse the company on a cents-per-mile basis or have the annual value of the personal use calculated and added to his W-2.

(B) The employee purchases or leases the vehicle and pays all the expenses of owning and operating it. He submits a form to the employer monthly (or quarterly) detailing his business miles and is paid for those miles at the current SMR. This method automatically eliminates any need for figuring the value of personal miles (if done honestly).

Both methods have the following advantages:

(1) Avoid the need for W-2 reporting (except the personal use portion under method (A).
(2) Avoid the employee's need to use F-2106 to report everything, which would require itemizing his own tax deductions and for which the F-2106 deduction is subject to the 2% haircut.
(3) No payroll taxes (except, again, on the personal use portion under method (A)).
(4) No income included for retirement plan purposes or worker's comp.
(5) Easier for all concerned and, probably, more economically fair to er and ee.

[TaxGuyBill]

Is there a reason why the employer doesn't want to set up an Accountable Plan, and reimburse the specific amounts?

If the employee is already keeping track of the expenses, it should be easy to do. That would make it completely tax-free to the employee, and the employer gets to deduct the full amount it pays (with no increase of FICA, unemployment, worker's compensation, etc.).

[Openfire]

Roland, thank you. I agree these are optimal ways to correctly account for the expense and give everyone the best tax advantage possible. I proposed these, and they were rejected.

Bill, I believe the owner would like it to be a consistent and guaranteed amount, as part of the employment package for this employee. I was just trying to find a legal way to not have it increase the other benefits, as the owner would like the amount to be viewed by the other employees as a benefit itself, rather than a raise.

[Jiggers]

Any allowance outside of an accountable plan is wages, subject to all the taxes including social security and medicare.

[kathyc2]

Sounds like the client wants it to be treated as compensation except when he doesn't. I would ask client for an estimate as to how much he projects the average monthly mileage rate to be. Then you could run numbers as to the tax consequences for the way he wants to handle it. I don't see why he can't have an accountable plan, and also issue a payroll bonus for the difference of the $800 and amounts reimbursed on accountable plan.