For many companies, every year brings new initiatives, goals, and provides time to re-align themselves to their desired company culture. Furthermore, as the Federal Reserve raises interest rates to the 15-year high, and operating costs continues to increase, it may be an appropriate time to re-evaluate your business’s vehicle reimbursement expenses. Many firms may be reluctant to change their reimbursement programs due to the challenge of attracting and retaining employees.
In many cases, employees who drive view their vehicle reimbursement as an employee benefit, similar to health insurance or paid time off. Depending on your company’s current vehicle reimbursement program, delivering an equal or even greater reimbursement to your employees while lowering the overall company expense is possible. In this article, we will walk you through several different reimbursement options and explain how a FAVR (Fixed and Variable Rate) program may be the best option for your company.
Car Allowance vs. IRS Standard Mileage Rate vs. Fixed and Variable Rate (FAVR) Program
Employee travel programs are the second largest expense for any company. When evaluating different vehicle reimbursement programs, deciding which program aligns with your company’s culture may take time and effort. Employers who want to avoid managing a fleet program frequently 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.
Car allowances are one of the easiest vehicle reimbursement methods to implement and manage. Typically, they are comprised of a standard allowance that each employee receives. Sometimes, drivers may also receive a fuel card or fuel reimbursement. Car allowances generally provide predictable cash flow, and drivers can drive their vehicles of choice.
Fuel cards are hard to track business and personal use.
While car allowances may be easy to implement, 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 ordinary taxable income instead of 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 total benefit provided to the employee. Additionally, a car allowance program may be inequitable since the same reimbursement level is standardized regardless of high and low mileage and high-cost and low-cost geographic regions. Typically, these programs expose your company to significant risk as companies fail to have an infrastructure for policy enforcement and insurance requirements.
The IRS standard mileage rate and why it does not provide an accurate reimbursement.
In this approach, the company reimburses for vehicle use based on the “Safe Harbor” IRS standard mileage rate. While this method is a simple calculation of business miles multiplied by the IRS Rate, it does not provide an accurate benchmark for current expenses. The IRS standard mileage rate is a reimbursement calculation comprised of a standard vehicle cost in the United States. The current rate is 65.5 cents per mile, so the more you drive, the higher reimbursement you will receive.
The IRS Standard Rate eliminates potential tax liability for a driver; however, the reimbursement under-compensates low-mileage drivers and over-compensates high-mileage drivers.
The graph below demonstrates how the IRS standard mileage rate is correct only once, depending on your driver’s location (approximately 11,000 business miles in Atlanta and 14,000 business miles in San Francisco). This method also creates unpredictable cash flows due to driving variability each month. When using a FAVR program, as explained in the next section, reimbursements are driven by actual cost data, which ensures drivers receive a sufficient reimbursement to meet their expenses while maintaining company costs.
FAVR (Fixed and Variable Rate) and why a FAVR program is 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 actual 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 components 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 provider in the FAVR industry. With over 200+ benchmark vehicles (including trucks and SUV’s) updated annually, our exclusive program brings certainty to drivers and plan administrators.
FAVR programs require a significant amount of data (vehicle cost, insurance, maintenance, ext.) and can be quite challenging to self-administer. Trusting a FAVR professional at AutoReimbursement.com can ensure that your program remains compliant with the IRS regulations and ensure that the program fits the needs of your drivers/company.
Want more information on a Fixed and Variable Rate (FAVR) Program at AutoReimbursement.com?
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