What are mileage reimbursements for employee-owned fleets?
Mileage reimbursements programs are tax-free ways to repay employees when they drive their own car for work. When a team of employees all use their personal vehicles, that’s an employee-owned fleet—this is in contrast to a company-owned fleet, where companies own all the vehicles that are driven for business purposes.
Enterprises used to send sales teams out in vehicle fleets or with car allowances and gas cards. Times are changing, and companies are turning to modern systems, which reimburse employees who use their own vehicle for work. In this article, we tell you everything you need to know about: vehicle reimbursement programs.
Traditional methods: fleet and allowance
Reimbursing drivers for using their vehicle at work is a solution, growing in popularity, to the problems posed by operating fleets and issuing car allowances. Fleets—large groups of company cars, owned or leased by the company—are administrative burdens, carry enormous insurance risks, and have high operating costs.
Car allowances—flat payments made to employees to supply and drive their own vehicle—are assessed for both income tax and payroll tax. A car allowance is treated as another category of income. Alternate vehicle programs that are not subject to payroll and income tax exist, so car allowance models are cost-ineffective.
An employee’s driving expenses may be expected to exceed the allowance paid in a given period, which discourages drivers from driving. No one should pay out of pocket to drive for legitimate business reasons. They may, in this case, visit their accounts less frequently, leading to less activity with customers and, potentially, lost sales.
A vehicle reimbursement program (“VRP”) is any program an employer introduces to repay vehicle expenses incurred by an employee for business use. VRPs can be intelligently designed to address the problems posed by fleet and allowance models.
This article covers two types of VRPs: cents per mile (CPM) and fixed and variable rate (FAVR) programs. Both strategies allow companies to jettison their bloated fleets and empower employees to use their personal vehicle at work.
Cents per mile
The Internal Revenue Service (“IRS”) suggests a standard mileage rate—a value in cents to be reimbursed to employees for every mile driven. Reimbursing employees according to this figure is a “cents per mile” system. At the time of writing, the IRS standard rate recommendation is 56 cents per mile.
This model also exists in Canada, where the Central Revenue Agency (“CRA”) recommends paying 59¢ per kilometre for the first 5,000 kilometres driven, 53¢ per kilometre driven after that.
These values are intended to accurately reimburse the individuals for the driving they do at work. They are also the greatest per-mile sum that can be paid as non-taxable reimbursements to employees. If an employee is reimbursed more than 56¢ per mile in the US, the excess is taxable.
This model is substantially more cost-effective than operating a fleet. The business owner is responsible for the vehicles when it is being used for employee commutes, when it is sitting idle on a lot, and even when a driver other than an employee is behind the wheel. Under a CPM model, the employer only takes responsibility for the vehicle when it is being driven for business purposes. When the vehicle leaves with the employee, for the evening or the weekend, the business is relieved of all financial and insurance obligations.
There are, however, problems with the cents per mile model. For example, CPM programs tend to reward high mileage drivers and punish low mileage drivers. High mileage drivers often receive well more than they need to own and operate their vehicle, whereas low mileage drivers do not receive enough.
For example, the fixed costs of owning and operating a vehicle, and driving it around a major metropolitan area, are high, even if the employee drives few miles. The wear and tear on the engine, and the fuel efficiency of the vehicle, are both worse in cities than on highways.
If a driver drove 6000 miles in LA in 2021, they would have been reimbursed $3,360 (at a rate of 56¢ per mile). In that same year, a driver who covered 45,000 country miles would have been reimbursed $25,200. Neither amount remotely reflects their actual costs.
Fortunately, the blind spots of the cents per mile model are addressed by the fixed and variable rate program, which we will now discuss.
Fixed and Variable Rate Reimbursements (FAVR)
FAVR programs, the gold standard for vehicle reimbursements, are significantly more granular than CPM programs; this is their primary advantage. Not only do they account for everything that CPM programs do (like business use vs. personal use of a vehicle) but they go further, taking into consideration a host of other factors that influence the dollar value of an employee’s vehicle reimbursements. Among these factors are geography and vehicle type.
Vehicle costs and expenses considered by FAVR programs include fixed costs—capital cost, tax, depreciation, and insurance—along with variable costs such as fuel, maintenance repairs and tires.
Geographical particularities include insurance costs, fuel prices, the miles per gallon (or liters per 100 km) and even the average cost of repairs in a certain locale. We have already noted the distinctions between urban and rural geography, but it is also worth considering the differences between the mountainous, cold-weather road conditions of Wyoming, and the hot lowlands in Texas. Each area poses unique challenges.
Insurance prices vary by zip code. Fuel prices also vary by region. At the time of writing, there is a difference of more than a dollar between the price of fuel on the Gulf Coast ($2.840) and on the West Coast ($3.919).
And in a city, the rate at which one burns through that fuel is significantly higher. How much fuel one uses varies widely based on the car, but what never changes is that driving on the highway is significantly more fuel efficient than driving in the city (all other things being equal).
It is unfair to pay the metropolitan driver the same as the driver who only covers rural roads and highways; unfair to pay the LA driver the same as their colleague in Lafayette, Louisiana.
The other major factor not included in CPM calculations is the kind of vehicle that a driver is driving. The IRS recommends paying 56 cents to drivers of Compact Sedans, EV’s and pickup trucks alike. These cars do not cost the same to own and operate and they are not necessarily ideal for the job. For these reasons, a proper FAVR plan implements the notion of a standard vehicle.
A “standard vehicle” is a generic profile that represents a specific vehicle or range of vehicles within a vehicle category (compact, mid-size, etc.). A “standard” car is chosen to accurately reflect the needs of an employee’s job. If it is reasonable to drive a Ford Fusion for work, then a FAVR program builds out a standard car profile that mirrors the attributes of the Fusion for the purposes of reimbursement.
A good FAVR program will offer a range of categories of standard vehicles. Some drivers may need to carry equipment or prototypes around for work and may need a pickup truck. Other drivers may need to impress important clients, necessitating a vehicle fancier than the norm. These needs can and should be reflected by the array of vehicles offered in any company’s FAVR program.
Within the program, a variety of profiles are built, and assigned to drivers based on their needs. Then, to remain compliant with the terms of the FAVR plan, employees must purchase a vehicle that matches their standard vehicle profile.
Drivers then record their mileage, and the program calculates their reimbursement based on mileage and the standard vehicle.
To qualify for non-taxable reimbursement under a FAVR program, employees need to meet all the compliance requirements set out by the IRS. Administrators also need to validate employees are properly insured with both business and personal vehicle insurance. Cardata’s FAVR programs have systems in place to alert drivers of lapses, and to encourage compliance with the other requirements set forth by the IRS. In the event a driver does not meet all the compliance measures, they will still be reimbursed, however the reimbursement may be assessed for taxes.
To accurately reimburse employees for using their own vehicle, some form of mileage capture system needs to be put in place. Outdated methods include taking odometer readings and manually maintaining a mileage log by filling out paperwork or spreadsheets; or using GPS or Google Maps to capture distance driven, storing trip logs, and calculating the reimbursement with recourse to the record.
Needless to say, these procedures are time consuming and inaccurate. It is easy to forget to reset an odometer, forget where the odometer reading began or ended, or leave the paperwork unfinished. Leaving the paperwork for the end of the week opens the door to more forgotten miles. This leaves employees guessing their business mileage and rounding the figure up or down.
And while Google Maps and most GPS systems accurately capture trips, they do not integrate with the many other aspects of a vehicle reimbursement plan.
What administrators and drivers really need is a system that automatically captures trips, analyzes the driving costs of a given employee, automates their reimbursement payments, and keeps a clear record of all reimbursements for internal and external audits. Apps, like Cardata’s, are the ideal solution.
That is a tall order, but Cardata can help you sort through it. Click on any of the links in the text to read more about each topic. Fill out the form below if you want to learn more about vehicle reimbursements programs, software, and other interesting issues covered by Cardata.