When it comes to driving programs, employer mileage reimbursement is expected. In fact, in many states, employers are legally obligated to reimburse mileage. But there’s a difference between providing mileage reimbursements and fairly and accurately reimbursing employees for their business mileage. That difference impacts the engagement and satisfaction of driving employees. In this post we’re going to dig into which popular employer mileage reimbursement options ensure fairness and accuracy.
There are four options widely considered the most popular vehicle programs. These programs include:
Of these, only car allowance, mileage reimbursement and FAVR are considered mileage reimbursement. And, while company-provided vehicle programs remain popular, they come with considerable costs. When it comes to fairness and accuracy, how do the other vehicle program reimbursements stack up?
With a car allowance, employers provide employees with a monthly stipend for the business use of their personal vehicle. This amount, typically around $575, does not change month over month. That makes it predictable to budget for and easy to implement. Unfortunately, that also makes it unfair.
Unless all driving employees work and operate in the same area, their driving costs will vary. A tank of gas in California does not cost the same amount as a tank of gas in Nebraska. For some employees, their monthly stipend will cover their cost of business mileage and then some. Others will run through it in three weeks. When an employee has spent everything the company will provide them to drive for work, they’re no longer have an incentive to drive. Not when they’re paying out of pocket.
When car allowances come up short, some companies provide driving employees with fuel cards. With a fuel card, employees can gas up their personal vehicle for business mileage they’re traveling. This can be a costly mistake as ensuring fuel cards are used strictly for business travel is impossible.
An additional issue with the car allowance program is tax waste. Because a car allowance program isn’t tied to the miles an employee drives, the IRS considers the stipend amount additional income. That means it’s taxable. The result? Employers pay more and employees receive less. Companies can implement an accountable allowance to remove some of the tax waste, but that doesn’t change the fairness of the program.
With a mileage reimbursement, or cents-per-mile (CPM) program, employers provide employees with a reimbursement based on business miles driven. This program relies on employees reporting their mileage accurately in mileage logs. Companies often use the IRS mileage rate to reimburse their employees. It removes the need to calculate a rate internally, and guarantees reimbursements are tax free. Unfortunately, this rate lacks accuracy.
Mileage reimbursements are a great vehicle program when reimbursing regional drivers that travel no more than 5,000 miles per year. Due to the program’s relative simplicity, companies will apply the same mileage rate to their mobile workforce across a wide range of states.
As with the car allowance, when employees drive in multiple different locations, the costs vary. Mileage rates are intended to help cover not only the cost of gas, but the general wear and tear of a vehicle driving business miles. Fair and accurate employee mileage reimbursement should be specific to the costs of the individual. The CPM program is not.
A vehicle program may be popular, but that doesn’t guarantee it reimburses fairly and accurately. Both car allowances and mileage reimbursements may over-reimburse some employees while under-reimbursing others. An employer mileage reimbursement leaving an employee short creates resentment and disengages them from the company. The ideal program reimburses all employees fairly and accurately. That’s where FAVR comes in.
With the fixed and variable rate reimbursement program, employers reimburse their employees for both the fixed and variable costs of using their personal vehicle for business. Fixed costs include expenses that don’t fluctuate often, like vehicle registration and insurance. Variable costs include expenses that do fluctuate, like fuel, maintenance, tires and more.
Each of these costs are specific to the driver’s geographic location. That means employee reimbursements will differ, fairly meeting the costs of the program. Like a CPM program, FAVR also requires accurate mileage logs. With the right vendor, these mileage logs can be automated and are IRS compliant.
It’s important to get reimbursing employees right. Getting it wrong can upset the mobile workforce and expose companies to lawsuit. Companies may opt for car allowance or mileage reimbursement programs, but may find reimbursements coming up short. With a FAVR program, companies ensure employees receive fair and accurate reimbursements. Are you running the right vehicle program? Start a conversation with us today to understand your options.