When a business – large or small – wants to avoid the hassle of overseeing company car programs, the best alternative is a car allowance, also known as a reimbursement program. But how does one choose the optimal mileage reimbursement program for employees who conduct lots of business travel using their own vehicles?
This is a pivotal decision for organizations seeking to prioritize both cost efficiency and equitable reimbursement for their workers. There are two fairly distinct approaches most recognized in the realm of rate allowances for employee reimbursement: Fixed and Variable Rate (FAVR) and Cents per Mile programs. Each method – distributed as either annual, quarterly, or monthly allowances – presents distinct advantages and considerations. The following article will unravel the intricacies of this choice by examining the factors that demand the most consideration, underscoring how similarities and differences can cater to the specific needs of an enterprise.
Assessing driver profiles
When it comes to selecting the appropriate type of car allowance for employee business-related vehicle usage, a crucial step in the decision-making process is assessing the driving patterns and mileage profiles of mobile employees. On the one hand, drivers who cover a significant number of business miles, benefit from the comprehensive coverage and inherent fairness offered by FAVR programs. On the other hand, a casual mobile workforce with sporadic business-related vehicle usage patterns finds Cents per Mile reimbursement to be a more fitting solution.
FAVR reimbursement: ideal for high-mileage drivers
FAVR stands as a mode of reimbursement suited for those intrepid high-mileage drivers who, in order to effectively carry out business purposes, must traverse the roads consistently using their own cars. The benefits of FAVR include but are not limited to the following:
- Comprehensive coverage: FAVR plans go beyond the limitations of Cents per Mile reimbursement by painting a complete picture of standard vehicle usage and the actual costs involved. In addition to variable costs, this method incorporates fixed costs such as insurance premiums, registration fees, and other business expenses that remain constant regardless of employee mileage. Furthermore, FAVR plans consider variable vehicle expenses, such as gas prices, depreciation, and maintenance, which fluctuate in relation to the number of miles driven and vehicle type. By doing so, FAVR ensures that employees are given reimbursement payments in a manner that captures the unpredictability of personal vehicle ownership, thereby aligning with the reality of vehicle costs incurred by an employee.
- Fairness and corporate equity: Equally noteworthy is the intrinsic fairness and equity embedded within FAVR plans. Drivers who consistently cover a significant number of business miles bear an increased burden of vehicle usage costs. FAVR acknowledges this by offering higher mileage reimbursement rates for these drivers, ensuring that they are justly compensated for their unwavering commitment. In other words, FAVR mileage tracking apps tend to foster a sense of fairness and equity within any organization, making it an ideal choice for organizations that prioritize the well-being and satisfaction of their workforce.
- Cost management: While FAVR plans offer larger reimbursement rates for high-mileage drivers, effective cost management remains crucial a crucial element. To safeguard against excessive expenses, FAVR protects against “driving for dollars,” wherein Cents per Mile drivers will accumulate tens of thousands of dollars in reimbursements every year. With these stopgaps, organizations can easily optimize the financial viability of their reimbursement programs without compromising the equitability of FAVR.
- Tax perks: This type of reimbursement can be tax-free even over the Internal Revenue Service (IRS) standard rate, that is, you can actually reimburse more on FAVR than on Cents per Mile, if this is appropriate for your workforce.
Cents per Mile reimbursement: suitable for occasional drivers
On the opposite end of the spectrum lies the CPM method, a more straightforward approach that has its own merits for organizations and employees alike. With this method, employees are reimbursed based on a fixed rate per mile driven, devoid of the nuances and risk management associated with FAVR plans. Cents per Mile reimbursement is, first and foremost, a fitting option for employees with occasional business mileage. Its simplicity helps reduce the administrative burden on both employees and the organization. By opting for Cents per Mile rates, organizations can effectively compensate occasional drivers while maintaining a streamlined and uncomplicated reimbursement process.
- Simplicity and ease of administration: CPM is straightforward for both employees and employers. Calculating the reimbursement amount is as easy as multiplying the number of business miles driven by the predetermined rate per mile. In most cases, mobile workforce management software will take care of the number-crunching automatically. Ultimately, the straightforward nature of this method reduces the potential for confusion or errors during the reimbursement process, streamlining administrative tasks and ensuring efficiency.
- Lower administrative burden: With CPM, there is less need for tracking and documenting specific expenses related to vehicle usage. Unlike FAVR plans that require comprehensive coverage of fixed and variable expenses, CPM focuses solely on mileage instead of a complex matrix of expenses, meaning there are few compliance measures that need to be followed.
- Flexibility: CPM provides organizations with the flexibility to set their own mileage rate based on their specific needs and policies. This allows for customization and adjustment to accommodate varying cost factors and considerations. Organizations can establish a variable rate reimbursement that aligns with their budgetary constraints, geographical locations (as determined by ZIP Codes), or industry standards. This flexibility empowers companies to fine-tune their programs to suit their unique circumstances while still providing a fair and consistent method of reimbursement for employees’ occasional business-related vehicle usage.
- Tax perks: Cents per Mile reimbursements are tax-free up to and including the IRS standard rate.
Hybrid programs offer the advantage of flexibility and adaptability. High-mileage drivers can benefit from the FAVR component of the program to guarantee that their increased vehicle usage costs are accurately reflected. Moreover, occasional drivers can be accommodated through the CPM component of the program. Once again, the simplicity and ease of administration associated with Cents per Mile reimbursement make it a suitable choice for employees with sporadic business-related vehicle usage. By implementing a hybrid program, organizations can strike a balance between cost efficiency and equitable reimbursement, despite shifting goals and uses of their mobile workforces. Running both FAVR and CPM simultaneously provides a strategic level of choice and customization that can enhance employee satisfaction and engagement.
IRS standard rate
When determining the ceiling for tax-free reimbursements based on the Cents per Mile method, the IRS standard rate serves as a crucial reference point. As of 2023, the IRS standard mileage rate for business use is 3 cents per mile higher than the previous year.
By adhering to this rate, organizations can ensure that their reimbursement policies align with the IRS guidelines, reducing the risk of non-compliance and potential issues for taxpayers. This standard mileage rate is regularly updated to account for fluctuations in fuel prices, vehicle operating costs, and other relevant factors in that could impact driving (supply chain issues and the like).
Consistent adjustment ensures the reimbursement rate reflects current economic conditions and the true costs associated with business-related vehicle usage. The IRS standard rate, moreover, serves as the benchmark for determining the ceiling of income tax reimbursements within the Cents per Mile method for a company’s team members and their taxable income.1
The selection of an appropriate vehicle reimbursement program is a difficult decision contingent upon a number of conflicting factors. FAVR reimbursement plans emerge as the preferred choice for traveling far distances due to their ability to provide comprehensive coverage, fairness, and effective cost management. Specifically, FAVR is ideal for those seeking:
- A granular program that accounts for regional market data.
- Generous reimbursements that are larger than the IRS standard rate program.
In contradistinction, Cents per Mile reimbursement works well for occasional drivers, as it offers
the advantages of simplicity, ease of administration, and flexibility. Ultimately, the key lies in aligning the reimbursement method with the unique requirements and characteristics of the workforce, ensuring a well-suited and efficient reimbursement approach that benefits both the organization and its employees. CPM, in short, is the best option for those looking for:
- A program that is easy to understand and manage according to governmental compliance measures.
It’s essential to remember that both FAVR and CPM have the potential to be completely tax-free, unlike traditional car allowances, most of which are very taxable. That being said, one ought to consider hybrid programs that incorporate both FAVR and CPM methods as a strategic alternative for organizations aiming to cover all their bases when it comes to flexibility, fairness, and customization. Hybrid programs enable organizations to provide comprehensive coverage for high-mileage drivers while accommodating the simplicity and ease of administration desired by occasional drivers. This blended approach ensures a well-rounded and effective reimbursement system that meets the diverse needs of the workforce. In that respect, varied programs like those of Cardata offer considerable flexibility and are determined to meet the unique needs of your drivers.
Disclaimer: nothing contained in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business, personal financial, or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants, or insurance agents. For several citations of IRS publications, on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.