What is a mileage allowance program and how does it work?
Mileage allowance. Sometimes, you hear a term and all you have are questions. What is a mileage allowance? How can it affect my company? What company does it work best with? Should my company be using it? The world of business vehicle programs is complicated. But we’ve explained all sorts of complicated topics, from oil trends to the IRS rate and other vehicle programs. We’re here to help answer your questions. So, first things first:
What is a mileage allowance?
A mileage allowance is a type of reimbursement, paid to mobile workers for the business use of their personal vehicle. The rate of this reimbursement is determined by the annual IRS business mileage standard—which is currently 58 cents per mile. You may be more familiar with terms like mileage reimbursement vehicle program, or a cents-per-mile vehicle program. Mileage allowance programs, also referred to as an IRS mileage allowance or a federal mileage allowance, are a version of these.
How will a mileage allowance impact my company?
That depends on the kind of vehicle program you currently have. A mileage allowance program is meant to ensure that employers reimburse their employees at the IRS business mileage standard for one main reason. Reimbursements at the IRS business mileage standard are non-taxable.
A mileage allowance can be seen as a saving measure when compared with car allowances. Companies using car allowance programs pay their mobile workers generally the same amount each month. But these car allowances, also referred to as flat allowances, lose money to taxes with each reimbursement. By switching from a flat allowance to a mileage allowance, companies would remove tax waste that affects both the employer and employee.
Mileage allowances can also save a business money when transitioning from company-provided vehicles. Businesses that use fleet vehicles usually also provide fuel cards to their mobile workers. While they do not need to reimburse for the business use of personal vehicles, they do need to pay for the costly up keep and turnover of fleet vehicles. These vehicles also expose the company to liability in the event of an accident.
While a mileage allowance might save a company money when compared with a car allowance or company-provided vehicle program, it’s still not an ideal program. In fact, as stated previously, it’s a mileage reimbursement program, or cents-per-mile program. But at the highest, untaxable price. Under-reimbursing mobile workers can result in labor law violation. On the other hand, over reimbursing has consequences of its own.
It can be very costly to reimburse mobile workers above an accurate rate. If a company has a small mobile workforce that generally drives under 5,000 miles each month, that might be an easier cost to manage. But companies with larger workforces that drive over 5,000 miles each month will see an unsettling T&E line in their budget.
Another area of vulnerability is the logging of these miles. Many mileage reimbursement programs rely on their mobile workers to write down their miles. And, if they want to remain IRS-compliant, include start and end locations, time and date, reason for travel and total distance. This not only takes valuable time from mobile workers, but also leaves the company exposed to mileage fraud.
Should my company use a mileage allowance?
If your mobile workers drive their personal vehicles for business and their regions don’t have them driving further than 5,000 miles each month, it’s not a bad program. That being said, it could be better. There are several benefits to reimbursing your mobile workers at an appropriate rate, cost savings being only one of them. Additionally, available technologies can reduce the administrative work associated with logging miles. No more scribbled mileage on scraps of paper and all the hassles associated come submission time. See if your company would be better off with a smarter cents-per-mile program.
If your mobile workers drive their personal vehicles for business and their regions do have them driving further than 5,000 miles each month, you’re going to want something else. The Fixed and Variable Rate (FAVR) Reimbursement program could be your answer. Find out more about FAVR programs here.