So you’ve decided to reimburse your employees for driving their personal vehicles for work. Problem solved, right? Not so fast.
Vehicle reimbursement has many advantages, but those benefits can be overshadowed by unnecessary costs if you implement the wrong program. Many companies lose thousands of dollars per employee each year by using the wrong program to reimburse their workers.
Only fixed and variable rate (FAVR) reimbursement programs take the full range of expenses drivers incur into consideration to provide fair, accurate and defensible vehicle reimbursements. Thanks to modern technology, implementing FAVR programs has never been easier. As the mobile workforce continues to grow, outdated reimbursement methods will continue to cost your company more each day.
The Many Costs of Driving for Business
Meeting the needs of mobile workers goes far beyond reimbursing for gas and tolls. Employees who drive for work incur both fixed costs, such as the price of car insurance premiums, license fees, and taxes, as well as variable costs, like fuel, maintenance, and tire wear.
These expenses differ from employee to employee, state to state, and trip to trip. We can probably all agree that it is only fair to reimburse mobile workers for these expenses. Only FAVR programs that track these costs and their fluctuations in real-time can provide truly accurate payments.
Despite this, inaccurate reimbursement programs abound. Even worse, many have taken hold as common practice.
Flat Car Allowances
Flat car allowances are single, company-wide rates used to reimburse all employees for business travel. Offering all drivers $300 per month for travel is an easy option. This makes flat car allowances a common reimbursement method. They are also wasteful and expensive.
A car allowance is not flexible enough to provide accurately for all employees, and will either underpay or overpay workers, depending on where they live and the costs each incurs. Additionally, flat car allowances are subject to both Federal Insurance Contributions Act (FICA) taxes and income taxes. Because of this, providing a flat car allowance of $300 costs an organization $322 after taxes, while employees take home only $225 (or even less, depending on their tax bracket).
Some companies reimburse a fixed cents-per-mile rate for all employees. This is another easy solution, but it can be a costly default option for all employees.
Like flat car allowances, cents-per-mile programs do not account for all the fixed and variable costs of driving. In addition to ignoring location-specific cost differences, these programs also incentivize wasteful behavior. A company would reimburse an employee driving 5,000 miles per year $2,500 using a 50-cent mileage reimbursement. This seems reasonable, until you consider that $2,500 would not even cover the insurance premium costs in Detroit ($3,400 on average), let alone fuel, maintenance, taxes, and more.
An employee driving 30,000 miles per year for the same company would receive a mileage reimbursement of $15,000. That’s about halfway to buying a new car. This disparity incentivizes employees to either drive more to earn extra money or drive less to avoid the wear-and-tear their cents-per-mile program will not fully cover. For this reason, cents-per-mile programs make most sense for lower mileage employees who drive infrequently and don’t rely on their vehicles as often for work.
Recognizing the complexity of calculating actual driving costs, the IRS created their own mileage rate. Many employers use this rate as a standard for reimbursement. The IRS mileage rate allows reimbursements to be paid tax-free, but it is far from perfect. The 2015 IRS mileage rate increased 1.5 cents, from 56 cents per mile in 2014 to 57.5 cents per mile in 2015, while gas prices fell nationwide.
This means that an employee who travels 10,000 miles each year would be reimbursed $150 more in 2015 than in 2014. They’d also spend much less at the pump. Companies blindly following the 2015 IRS mileage rate have already paid their employees more for spending less money on fuel in 2015.
FAVR Programs: The Only Fair and Accurate Solution
FAVR is the most accurate reimbursement solution. It provides a customized reimbursement to each mobile employee based on their local costs and monthly business mileage. In addition to being fair and accurate, FAVR reimbursements can be paid tax-free.
With FAVR, all employees are not paid the same monthly lump sum amount or cent-per-mile rate. Companies reimburse each individual employee using fixed and variable reimbursement rates that reflect the true cost of operating a vehicle specific to their location. In the past, trying to implement a FAVR program yourself was considered complicated. In many cases, companies considered it prohibitive from an administrative standpoint. Think of the data collected and updated to ensure each employee is reimbursed appropriately. Fortunately, this is no longer the case. The same technology that has reshaped the modern office and allowed workers to remain effective on the road has made implementing and administering FAVR programs easier than ever before.
The Bottom Line
Flat car allowances, cents-per-mile programs and the IRS rate offer simple personal vehicle reimbursement solutions. Still, they are far too inflexible to provide accurate repayments. Any reimbursement methodology that repays all employees the same rate, regardless of the costs of vehicle operation where they live, is flawed and creates winners and losers within your employee base. Only FAVR programs provide fair and accurate reimbursements for mobile workers.
Experts predict mobile workers will account for nearly three quarters (72.3%) of the US workforce by 2020. As the modern office continues to go mobile and more and more employees are on the road, choosing the wrong vehicle reimbursement program for your organization may end up being one of the costliest decisions you’ll make.