Is Providing a Company Car a Good Idea?



Are you a business owner considering whether to provide company cars for your employees who travel frequently for business?  In this article, we will explore the costs associated with providing company cars in comparison to the standard mileage rate reimbursement. 

Which option to choose depends on the goals and specifics of your company’s situation. There are many factors to consider when making this decision, including some factors that are not directly associated with cash outlay.  Perhaps your company is struggling with hiring and retaining high level sales associates, or would benefit from some additional advertising in the area. 

From a human resources standpoint, offering company cars to employees can be a nice perk and may help attract top notch talent.  If your company is struggling with employee retention, perhaps providing company cars will solve that issue.  But from the finance side, this option could be more costly than mileage reimbursement.  How can we determine which option is best for your company?

First, let’s crunch some numbers…
In this example, a car is leased at a cost of $375.00 for your employee who drives 12,000 miles per year (all on business), the car gets 25 mpg, and gas costs $3.00 per gallon.  Here is a detailed list of the estimated costs per month:

Monthly lease payment: $375.00
Fuel costs (25 mpg)    $120.00
Insurance $100.00
Taxes / registration $25.00
Maintenance / Repairs $65.00
Estimated costs per month  $685.00 
   
Standard mileage reimbursement $575.00


Compare this cost of $ 685.00 to an estimated cost of $ 575.00 per month if your company reimburses your employees the IRS standard mileage rate of 57.5 cents per mile.  Looking at it from strictly a cost perspective, the mileage reimbursement option looks like a no brainer since it is over $100 less per month.  Depending on how many employees you have to provide a car, it can add up quickly.  However, as in most decisions, there are other things to consider besides just the direct financial outlay.  

Providing a company car can help employee retention and satisfaction.  If your company is having trouble keeping employees who put a lot of miles on their car, remember that there is a cost associated with recruiting and training the new sales employees.  The employer provided car may be a good option for a company who has high turnover in their sales force. 

Using company cars may allow a company logo for additional advertising as your employees travel in the area conducting business.  As a business owner, there is also the benefit of being sure that the image of your company, the look of the car, reliability, and common theme (think a fleet of Prius’s or Chevy trucks) is under your control.  With this way, there is no wondering what image your team is presenting to your customers in terms of the car they are driving.

One final thought are tax consequences for the employees driving the vehicles. Current IRS regulations require employers to report the value of any personal use of the company automobile in that employee’s W-2. This is typically done at year-end and at a minimum, must include the commuting miles driven from that employee’s home to the office location. Most employers fail to include this and if audited, could result in tax assessments for unreported wages, taxes, and penalties.
Considering all the factors associated with a decision is critical in making the right decision for your company.  There is no one correct answer for every company in regard to whether providing company cars to your employees.