Do Your Company’s Mileage Reimbursement Program a FAVR

Businesses that rely on mobile workforces have choices when it comes to paying for or reimbursing employees for work-related driving costs. Traditionally, companies have turned to one of three models:

1. Cents-per-mile reimbursements
2. Standard car allowances
3. Fleet vehicles

Cents-Per-Mile Reimbursements

This travel and expense reimbursement model provides employees with a standard amount for each mile they drive for business purposes, usually based on the IRS mileage rate.

Pros:
It’s simple to administer and easy for employees to understand. The cents-per-mile rate is also updated annually by the IRS, helping to ensure some level of fairness and tax compliance.

Cons:
The primary downside is that it assumes a “one-size-fits-all” cost of driving, regardless of region, vehicle type, or actual expenses incurred. This can lead to under-reimbursement for employees in high-cost areas and over-reimbursement in lower-cost regions. For frequent drivers, that imbalance can impact compliance and how employees plan their travel.

Standard Car Allowances

A car allowance involves providing employees with a flat monthly stipend to cover the cost of using their personal vehicle for work.

Pros:
It’s predictable and easy to budget. Companies don’t need to track mileage, and employees know exactly how much they’ll receive.

Cons:
Because allowances are typically treated as taxable income, both the company and the employee may end up overpaying on taxes. Flat allowances also don’t account for actual usage, leading to inequity among employees who drive very different distances or in different regions.

Fleet Vehicles

Companies provide employees with a company-owned or leased vehicle to use for work purposes.

Pros:
Fleet vehicles allow for a high degree of control over the cars used, ensuring branding consistency and standard vehicle performance. Costs can also be centralized.

Cons:
Fleet management is expensive and resource-intensive, involving acquisition, maintenance, insurance, and administrative oversight. Additionally, companies assume full liability for the vehicles, which can expose them to risk in the event of an accident or misuse.

What Is the FAVR Model?

In the first two installments of this three-part series on creating an effective, equitable vehicle program, we took a look at the challenges companies typically face as they consider options for high-mileage drivers. Then we laid out the risks and potential exposures inherent in each of the traditional approaches. Here, we’re exploring what an increasing number of companies are recognizing as a better alternative: fixed and variable rate (FAVR) reimbursement.

NOTE: The FAVR model is designed for workers who drive their personal vehicles for job-related purposes at least 5,000 miles each year.

A FAVR reimbursement program is commonly built on six components – three fixed and three variable – all of which are incorporated into reimbursement calculations customized for each employee driver.

Fixed Costs

Fixed costs include predictable expenses, such as:

• License and registration fees: These are state-specific costs that drivers must pay to operate a vehicle legally. FAVR incorporates local rates to ensure employees are reimbursed appropriately based on where they live and register their vehicles.
• Taxes and depreciation: Every vehicle loses value over time, and that depreciation is a real cost to drivers. FAVR calculations include fair-market depreciation based on vehicle type and mileage, helping employees recover the long-term cost of using their personal car for work.
• Insurance premiums: Auto insurance varies dramatically by region, driving history, and vehicle model. FAVR accounts for these differences by factoring in the actual insurance rates relevant to each employee’s location and vehicle.

Variable Costs

Variable costs include items like:

• Maintenance: Oil changes, brake replacements, and other routine maintenance needs vary with mileage. The more someone drives for work, the more often their car needs servicing. FAVR adjusts reimbursements to reflect this increasing wear and tear.
• Fuel and oil: Fuel prices can fluctuate significantly by geography and over time. FAVR uses real-time data and local fuel rates to ensure employees are reimbursed fairly for their actual fuel expenses.
• Tire wear: Tires degrade faster with more miles, especially under varying terrain and weather conditions. This cost is often overlooked in other models, but FAVR includes it to reflect the true operational cost of driving.

Why Is a FAVR Reimbursement Program a Better Solution?

Compared to the three traditional models, FAVR reimbursement is:

More Equitable

More equitable than cents-per-mile reimbursements because it avoids over- and under-payments, which can diminish employee satisfaction. Because FAVR reimbursements are based on actual rather than estimated out-of-pocket vehicle usage costs, employers do not overpay, and employees get their fair share. FAVR also lends to employee satisfaction, as it allows people who drive for work to drive their own preferred vehicles.

 Less of a Tax Burden

Less of a tax burden compared to car allowances because it eliminates the possibility of employers and employees overpaying FICA taxes for imprecise allowance payments.

There are no tax liabilities for either party since FAVR reimbursements comply with IRS standards and do not qualify as additional income. Calculating reimbursement rates per the FAVR model is the only IRS-recommended methodology.

More Cost-Effective, Less Risky

More cost-effective and less risky than fleets because it saves companies the significant financial and administrative burden of managing fleet vehicles while lowering round-the-clock liability.

An Automated FAVR Reimbursement Solution

With a FAVR reimbursement calculator, automation is key.

SAP Concur FAVR by Motus automates the calculations, capturing, mapping, and reporting on actual work-related vehicle usage in real-time. It’s also scalable and cloud-based, adjusting for fluctuations based on location, vehicle type, and other factors. Best of all, as an SAP Concur Endorsed App, the Motus App integrates fully with Concur Expense, enabling you to fold it seamlessly into your existing administrative and reimbursement systems.

To sum it up, FAVR is a tax-free methodology for mileage reimbursement that's well-suited for drivers who drive more than 5,000 miles per year. Learn more about the FAVR methodology in this video.