Corp CC used to pay for gas of outside sales employee-is mileage tracking required?

[PCChick]

Employer gives credit card to sales employee to use for gas and other business expenses.  Credit card given to employee for gas purchases to eliminate mileage tracking. Employee does not track business mileage.  Receipts for gas and other purchases are submitted to employer.  It seems that the gas purchases would fall into the "non-accountable" plan and be included in W2 compensation since mileage is not being tracked.  None of the credit card purchases are included in employees W2 compensation.  Also, employer increased salary by $500 per month to cover vehicle expenses except for gas. What is the difference in a car allowance and paying higher salary if both are included in W2 compensation? Trying to figure out how to be in compliance with the IRS and also with CA 2802.  Does anyone know about this?

[TaxGuyBill]

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@PCChick wrote:

What is the difference in a car allowance and paying higher salary if both are included in W2 compensation?

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Calling it a "car allowance" makes the employee feel good about being compensated for wearing down his vehicle. 

Calling it a higher salary makes the employee think "hey, I got a raise, but these car expenses are killing me".

[qbteachmt · Accepted solution]

Putting gas in the employee's car is taxable to the employee. They are "throwing money at them" for something that cannot be proven. There is no way to state you split a tank of gas. That's why the Mileage Allowance method works. What you have is personal use of company resources, which is either to be repaid by the employee (and then they would turn in mileage) or taxable to the employee, because money is always taxable (runs through payroll).

Their intentions are fine, but there is a reason the IRS uses the phrase "An Accountable Plan." It's not Reimbursement. It's just more money.

[PCChick]

Thank you qbteachmt!  I had come to the same conclusion, but wanted someone else's opinion.

[PCChick]

qbteachmt-

I'm trying to understand what the advantage of having a car allowance would be vs enhanced compensation.  If mileage is not tracked, the car allowance is compensation.  Is that difference that if mileage is tracked for car allowance it is not taxable?  Using the car allowance gives you both options?

[qbteachmt]

"I'm trying to understand what the advantage of having a car allowance would be vs enhanced compensation."

As Bill pointed out, it's just semantics. Same concept, functionally.

"If mileage is not tracked, the car allowance is compensation."

Because it's just Money. You are relating things that don't relate. If mileage is Tracked and reported and meets An accountable Plan requirements, the employer can pay out that amount under the terms of An Accountable Plan. If I don't need to account for it, and my employer gives my money anyway, it's Taxable. It's Money, not Money for a qualifying reason that is proven.

"Is that difference that if mileage is tracked for car allowance it is not taxable? Using the car allowance gives you both options?"

There is no such thing as Not Taxable "allowance." They are not "tracking mileage" so much as "tracking business." If you think of it like that, it helps. The same would be true for Food and Paper. If I bring you a receipt for printer paper, my lunch, and I hand you that printer paper, you reimburse me for the Office Supplies. I bought from Staples and you bought from me. My lunch is not reimbursed. We all have to eat. It was my choice to eat out, not pack a lunch or go home for lunch.

You might be confusing Mileage Allowance (for purposes of the IRS) with Actual Costs. You cannot pay Actual Costs for a car not owned by the business. You cannot pay to repair the employee's transmission, have it towed, or all new tires. The Employee owns the car. If the employer wants to pay for those, that's Bonus, as taxable wage. It's more money, in other words.

Or, you might be thinking of Per Diem, which is not really an Allowance. It's a way to Reduce Paperwork. The IRS sets per diem so that we don't need to turn in receipts for business lodging and meals that qualify as business purpose, like out of town trips over a few nights gone.

[qbteachmt]

Here is another example:

You don't want the employee to be "out of pocket" on these costs, so you Advance them $500. At the end of the month, they turn in an Expense report, with mileage and other proof of qualifying costs. You reduce the $500 loan by the total you owe them under An Accountable Plan. Then, you refill their loan amount back to the $500 Advance limit. When they quit, they either give you their change or you run the remaining amount loaned through payroll so that is it taxed to them.

[PCChick]

Thank you very much for taking the time to respond to my questions.  I appreciate it!

[qbteachmt]

You were already on the right track. Glad to help.