For businesses that rely on driving employees, reimbursement for vehicle expenses is a top priority. Companies can reimburse employees using a variety of programs: car allowances, cents-per-mile reimbursements and more. Many of these programs have more than one name, and the ways they calculate reimbursements vary as well. However, as the number of mobile workers continues to increase, the one-size-fits-all vehicle programs expose their drawbacks. These drawbacks often affect not only the employer, but the employee as well. When looking for a more fair and accurate way to reimburse employees for vehicle expenses, more employers are turning to FAVR mileage reimbursement.
Fixed and Variable Rate (FAVR) mileage reimbursement, also referred to as a FAVR reimbursement plan or FAVR vehicle reimbursement plan, reimburses employees for the fixed and variable costs of vehicle ownership. What exactly does that mean? What separates “fixed” costs from “variable” costs?
The term “fixed costs” refers to expenses that are consistent each month but vary from employee to employee due to factors such as vehicle type, miles driven and location. Examples of fixed costs include insurance premiums, license and registration fees, taxes and depreciation.
Variable costs, on the other hand, can change each month and are based on number of business miles driven and geography. Variable costs include gas, oil, maintenance and tire wear. As we’ve seen from recent gas price trends, these prices can fluctuate significantly over time.
FAVR is the smart option for companies looking for a vehicle program that fairly reimburses employees, while protecting from excessive spend and accident liability. There are several ways a FAVR mileage reimbursement is different from a typical mileage reimbursement. At the top of these reasons is the fact that FAVR is the only methodology recommended by the IRS. Other reasons include:
FAVR reimburses for fixed and variable rates of individual driving employees. This includes maintenance, oil, tire wear and other incidental expenses. Mileage reimbursement rates, on the other hand, do not provide accurate or fair reimbursements for variable driving costs far beyond fuel.
Traditional mileage reimbursement programs are based on data from the previous year. This often results in static rates that do not accurately reflect the reality of employee expenses. FAVR mileage reimbursement allows employers to adapt to fluctuating market conditions, making it more fair and accurate for employees.
No two employees are exactly alike. The same goes for their expenses. Your rural driving employees and your city driving employees have entirely different experiences. A company’s reimbursement strategy should account for those differences. Unlike cents-per-mile programs, FAVR reimbursement payments are specific to each driving employees’ location and the costs that are unique to that location.
FAVR mileage reimbursement may sound like it’s more complicated and harder to track than a typical mileage reimbursement, but that is not the case. With the right vendor, FAVR mileage reimbursement can simplify manual processes with automation, ensure compliance and provide accurate payments, all while controlling costs. Interested in learning more? Check out our FAVR offering.