Flat car allowance models have historically been a popular method of mileage reimbursement. With a car allowance, companies use a single, company-wide rate to reimburse all employees for any business travel. Unfortunately, though, this model just isn’t flexible enough to reimburse all employees fairly. For example, companies may give each employee $300 a month to cover all business travel expenses. But, by not calculating individualized, location-specific reimbursements, companies usually end up either underpaying or overpaying workers.
To overcome the inaccuracies flat car allowance models can introduce, companies have switched to fixed and variable rate (FAVR) programs. With this program, companies distribute customized reimbursements to each mobile employee. These are based on their location-specific costs (e.g. gas, insurance, taxes, etc.) and their monthly business mileage. Unlike flat car allowance models, FAVR programs are based on individualized driving costs. They’re also part of an IRS-approved revenue procedure. This means that FAVR programs aren’t subject to FICA taxes or income taxes.
By removing tax liabilities and applying real-time geographic and mileage-related cost data, FAVR programs can result in soft savings. These include increased employee efficiency and customer satisfaction. A company can also realize hard savings of up to hundreds of thousands of dollars per year.
In addition to providing greater reimbursement accuracy and significant cost savings, FAVR programs also offer greater compliance capabilities. They eliminate the legal risks of under-reimbursing employees, which can lead to state labor violations or even the threat of class action lawsuits.
Given the substantial benefits FAVR programs can provide both companies and their employees, it rarely makes sense not to implement this reimbursement model. However, like most corporate decisions, the key to successful and long-lasting change is clear and proactive communication. Companies need to take the time to explain the value of FAVR programs to their mobile employees and clearly outline their reasons for switching. Below are three key talking points companies should highlight in preparation for transitioning to a FAVR program:
One of the most effective ways to start the conversation about switching from a flat car allowance model to a FAVR program is to explain to employees that vehicle-related expenses are no different than any other category of T&E (Travel & Expenses).
It’s important that everyone in the company – employees and executive-level management – understand that reimbursements are reimbursements, not perks. After all, an employee wouldn’t think it was reasonable to be reimbursed $100 for a meal. Even if the receipt they submitted was for just $64!
Take the time to ensure that everyone agrees and understands that reimbursement is not added compensation. Emphasize a reimbursement for business driving is not a perk.
Notifying employees about an upcoming transition to a FAVR program is actually an easy conversation to have, because the benefits are very clear for both employees and the company.
Keep the conversation simple and explain that by eliminating tax waste, a FAVR program allows the company to outlay less money while also keeping mobile employees’ take-home pay amounts the same (and now their take-home pay is tax-free, too!).
Companies can leverage those resulting savings to reimburse mobile employees at higher net take-home amounts, all while still saving the company money. Reinforce that FAVR programs are truly a win-win situation for both employees and the company.
It’s important to communicate the following to employees:
1. that they need to capture their mileage in a FAVR program
2. why they need to capture their mileage and
3. what exactly a compliant mileage log is.
Some employees may not be accustomed to logging mileage, so there may be some initial push back. Or, perhaps they’re used to recording their mileage by hand, on paper. Explain that this outdated method of mileage tracking is just too time-consuming. Additionally, it almost always leads to mistakes and inaccuracies.
Discuss how mileage logs are one of the most important tools mobile workforce managers can use to fairly capture, reimburse and report on employees’ business driving. Also, when used effectively, mileage logs can offer a clear picture of personal and business usage that’s both accurate and defensible in the event of an audit.
The bottom line is, it’s essential to automatically capture employee mileage in order to ensure fair reimbursements, maximize tax-free reimbursements and remain compliant with the IRS.
For companies that choose to transition from a flat car allowance model to a FAVR program, significant cost savings can be realized – not to mention greater reimbursement accuracy.
Making the transition doesn’t need to negatively impact employees, either, or lead to a larger cultural shift in the company. Before making the transition to a FAVR program, however, it is important to take the time to explain its benefits and outline why and how your company will implement this new reimbursement model.
Once everyone in the company fully understands that FAVR programs allow mobile employees to receive an accurate mileage reimbursement while also eliminating the FICA tax burdens to the company and the individual, the only question remaining will be, “Why didn’t we transition to FAVR sooner?”