Mileage Reimbursement 101: Solution Choosing Need-to-Knows

Reimbursing your mobile workforce correctly is of utmost importance. If done incorrectly, your company can expose itself to risk of a potential class-action lawsuit (which in some cases has cost businesses upwards of seven figures).

Reimbursing mobile employees who drive 5,000 or more miles per year can be a complex and often stressful process. When driving for business, many different variables are at play. How should an employee be reimbursed for gas, tire wear, and maintenance? What about insurance premiums, license and registration fees, and taxes? The fact is, vehicle reimbursements are not created equal. Chances are, your workforce is made up of employees that drive different distances in different areas of the country.

These differences lead organizations to consider which mileage reimbursement program is right for their business. Each program has its share of pros and cons dependent upon the company. Let’s take a look at three different mileage reimbursement options that organizations can administer.

Car Allowance program

To reimburse all employees the same dollar amount (e.g. $700 per month), a car allowance program is a suitable fit. In theory, this is fair because all employees receive an equal amount and nobody gets special treatment. The problem that arises is that this type of program disregards the unique costs an employee incurs in addition to where that employee drives. The cost of insurance premiums or property taxes in a small town in Georgia, for example, would differ from those in New York City or Los Angeles. Similarly, fuel prices would also differ in those areas. Even further, a car allowance program could be costly because it is subject to both FICA and income taxes.

Cents-Per-Mile program

In a cents-per-mile program, mobile employees are reimbursed a fixed cent-per-mile amount. Normally, companies will reimburse their workforce based off the IRS standard mileage rate for a given year (0.58 cents-per-mile in 2017). This rate may sound reasonable, but it is actually only recommended to be used as a tax accounting tool for mobile employees that aim to claim un-reimbursed mileage and lower their tax bill to the IRS. This program over-reimburses mobile employees that drive a lot, and under-reimburses those that don’t drive as much. As a result, cents-per-mile programs encourage faulty driving practices such as driving more frequently than what’s needed to receive a richer reimbursement, or driving less frequently to avoid depreciation costs that aren’t covered in this type of vehicle program.

A Better Solution

When selecting a vehicle program for your business, what matters most is reimbursing your mobile employees as accurately as possible. Car allowance and cents-per-mile programs are simply unable to accomplish this task. To avoid the perils of a class-action lawsuit, maintain an IRS compliant workforce, and reimburse mobile employees fairly and accurately, companies should choose automated mobile workforce solutions. A fixed and variable rate reimbursement program reimburses employees for how much they drive for business per year while factoring in exactly where they’re driving. This eliminates any chance of an employee in Kansas receiving the same reimbursement as an employee in Chicago, for example. FAVR is the way to go.

Interested in learning more about mileage reimbursement programs? Check out our guide for more information