Reimbursing employees who drive for work can be tricky business. There are many “moving parts” to consider, like volatile gas prices, maintenance costs, insurance premiums, and taxes, just to name a few.
To further complicate matters, wasteful reimbursement strategies have become common practice for many organizations. Over the past eleven years, we’ve found that offering fair, accurate, and IRS-defensible reimbursement programs can save companies significantly. On average, we save our clients $3,000 per year for each mobile employee through our fixed and variable rate (FAVR) reimbursement program. Want to know how? Read on.
What’s So Complicated About Reimbursement?
We can all agree that organizations should only reimburse their workers for incurred business expenses. Doing so is not only financially responsible; it is also fair to both employers and employees. No company in their right mind would reimburse an employee $50 for a meal receipt showing it cost $42.98, right?
However, many companies do just that with their vehicle reimbursements, inadvertently treating them as disguised compensation programs. Employees who are overpaid for travel are treated to a kind of “back-door” bonus. Data and detailed records are typically required to prove actual expenses in all other aspects of a business (meals, hotels, airfare, to name a few), but many vehicle reimbursement programs pay all employees a flat rate or monthly dollar amount, regardless of the costs each employee actually incurred.
These programs are far from perfect. Quite far, in fact. They can actively deter (for those getting a car allowance) or incentivize driving (for those getting a cents-per-mile reimbursement) in order to inflate those travel “bonuses”. In fact, many have heard the saying “If you can’t sell, drive!”, in reference to cents-per-mile reimbursement programs, which over-reimburse employees when they drive higher mileage.
Which Vehicle Reimbursement Program is Right for Me?
Fixed and variable rate (FAVR) reimbursement programs, like those Motus administers, take the many costs of vehicle operation into consideration when reimbursing workers. Unfortunately, many employers are unfamiliar with FAVR and instead resort to a flat, monthly car allowance ($300 a month for all workers, for example), the IRS mileage rate, or a custom cents-per-mile program.
Flat, one-size-fits-all reimbursements based on average costs, like car allowances and cents-per-mile programs (including the IRS mileage rate), almost certainly over-reimburse some employees and may under-reimburse others. One need not look further than the variation in fuel prices across the United States to understand that the costs of owning and operating a vehicle vary dramatically from state to state as well as city to city. Our own research shows that the cost differences can be huge.
Motus saves our clients $3,000 per driver per year, on average, when they transition to a fair, accurate and defensible FAVR program. Only FAVR vehicle reimbursement programs account for geographical and driving behavior cost differences when calculating an individual’s reimbursement amount.
FAVR programs enable employers to reimburse their drivers based on their unique costs to operate their vehicle for business as opposed to a generalized or flat assumption of their costs. In a nutshell, accuracy is what enables our partners to realize savings and ensure that they (and their employees) are IRS-compliant. Want to learn more? Take a look at our free report, which highlights the risks to employers with respect to the IRS and Labor Codes in certain states, like California.
The Bottom Line
Accurately reimbursing your workers who drive for business has a significant and direct impact on employee behavior (and morale), but also on your bottom line. As the workforce continues to mobilize, it is fast becoming a necessity.
We’ve found that, on average, companies save $3,000 per employee each year when transitioning to an accurate FAVR vehicle reimbursement program. Of course, the inverse is true: until you begin fairly and accurately reimbursing your workers, you may be throwing $3,000 out the window each year for every single employee who drives for your business.
Try explaining that to your CFO.