Car Allowance vs. IRS Standard Mileage Rate vs. FAVR Program
Employee travel programs are often the second largest expense for any company. When evaluating different vehicle reimbursement programs, deciding which program aligns with your company’s culture may be challenging. Frequently, employers who do not want to manage a fleet program choose between a car allowance, the IRS standard reimbursement rate per mile, or a FAVR (Fixed and Variable Rate) Program.
Car allowances create a high tax liability for companies and drivers
Within a car allowance, there is often a substantial amount of tax liability associated with the reimbursement on both the employer and employee sides. Since the program is not an IRS-Accountable program, the reimbursement is classified as taxable income instead of an expense reimbursement. The employer tax liability associated with a car allowance is the total of FICA, FUTA and SUTA and the employee tax liability is anywhere from 20-40%. Therefore, the financial liabilities associated with car allowance limit the full benefit provided to the employee.
The IRS Standard Rate does not provide an accurate reimbursement
The IRS Standard Mileage Rate is a reimbursement calculation that is comprised of a standard vehicle cost in the United States. The current rate is 62.5 cents per mile, so the more you drive the higher reimbursement you will receive. This program eliminates potential tax liability for a driver, however, the reimbursement under-compensates low-mileage drivers and over-compensates high-mileage drivers.
FAVR (Fixed and Variable Rate) Programs are the best option for employees on the road
A FAVR (Fixed and Variable Rate) Program provides an IRS-Approved Non-Taxable vehicle reimbursement. This means there is no tax liability for drivers in a fully accountable FAVR Program. FAVR reimburses the drivers’ benchmark expenses based on real vehicle data. The reimbursement is also geographically sensitive. Therefore, a FAVR program calculates direct costs the driver incurs daily. Not only this, it enables driver’s choice— Drivers can purchase the vehicle that suits their lifestyle best!
There are two main parts to a FAVR Vehicle Reimbursement Program.
- Fixed reimbursement: The fixed rate includes depreciation from a benchmark vehicle, insurance down to 44,000+ zip codes, and license, registration, and property tax by state.
- Variable reimbursement: Cost of fuel, maintenance, and tires per mile— this is based on mileage driven each month.
AutoReimbursement.com is a leading vehicle reimbursement program in the FAVR industry. With over 200+ vehicles updated every year, our exclusive program brings certainty to drivers and plan administrators.
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