Is Automobile Insurance a Fixed or Variable Cost?

Introduction

If your team is reimbursing drivers under a Fixed and Variable Rate (FAVR) program, it can be challenging to understand at first what qualifies as a fixed cost and what’s considered a variable cost. Contrasting other vehicle reimbursement options like traditional flat-rate car allowances or a Cents per Mile program, a FAVR program divides expenses as either fixed or variable. From tax-free reimbursements to more accurate, fair payments, a compliant FAVR program can have big benefits for employees and teams. 

Read on to understand the difference between fixed and variable costs in a FAVR program, and how vehicle insurance fits in. 

Is Vehicle Insurance a Fixed or Variable Expense?

Within a FAVR program, vehicle insurance is considered to be a fixed payment within a FAVR vehicle reimbursement program. This means that the expense doesn’t change — even if an employee drives twice as much one month compared to the last, the amount of the fixed payment stays the same. According to the Internal Revenue Service (IRS), other fixed payments include things like depreciation, lease payments, registration and license fees, and more. 

Contrasting fixed expenses, variable expenses within a FAVR program change based on the mileage driven and other factors. Variable costs in a FAVR program can include gasoline, repairs, tolls and other road-related fees, parking, and more. By taking into account the different variable costs incurred, employers can make sure that reimbursement payments more accurately reflect the actual expenses associated with work-related driving.

Understanding Vehicle Reimbursement in FAVR

There’s no overstating just how essential it is for your employees to have the right coverage when it comes to driving for work. While many drivers might be under the impression they hold the appropriate coverage, they might actually only hold personal coverage, not business use coverage. Having business use designation is essential to make sure that employees and the company are properly covered in the event of any incident. 

Why Accurate Classification Matters

Understanding which expenses are considered fixed and which are variable isn’t just a matter of convenience; it’s integral to the functioning and compliance of a FAVR program. FAVR provides substantial benefits both for employers and for employee drivers — when compliant with IRS rules, reimbursements are eligible to be considered as tax-free. If a business misclassifies expenses, reimbursements can no longer qualify for this tax-free status. Beyond making these payments subject to income tax for the employee driver, this means that they’re also subject to payroll taxes for the employer.

Beyond accurately classifying expenses, businesses need to make sure other IRS rules for FAVR programs are followed. This includes requirements like that there need to be at least 5 eligible drivers on the program, that they need to drive at least 5000 miles for work purposes annually, alongside other requirements having to do with the cost and age of the vehicle used for business travel. For finance teams, accurate classification provides a clear audit trail, showing that reimbursements follow IRS guidelines. In case an audit occurs, this documentation helps protect both the company and its employees. 

How Vehicle Reimbursement Software Can Help

A FAVR reimbursement program can be beneficial for teams to implement, especially when dealing with complexities like drivers working across regions or driving different amounts. But for a wide range of companies, FAVR can hold big benefits when it comes to tax-free payments and reimbursing employees in a fair way that reflects genuine expenses.

When it comes to managing a vehicle reimbursement program, bringing in an expert partner with powerful software can be a big help. Reimbursement software like Cardata can help teams by providing a GPS-powered mileage tracking app for precise mileage capture, alongside a platform for easy reimbursement payments, tools to help maintain compliance, reporting capabilities, and much more. 

Making sure your employees have the right vehicle coverage is key. But, it’s something that can be especially complicated with employees in different regions, with different types of plans, and more. Partnering with Cardata means that teams have support with selecting the best insurance requirements, and making sure that drivers are eligible for the insurance selected — helping to make sure you never have to deal with the stress of wondering whether your employee drivers are compliant.

Disclaimer: Nothing 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 or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor 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.