In the dynamic landscape of today’s workforce, in which traveling for work in personal vehicles is the norm, employers are adapting their policies to accommodate the changing needs of their employees. One such area that has seen evolution is vehicle reimbursement programs. These programs aim to compensate employees for the use of their personal vehicles for work-related driving.
Vehicle reimbursement programs vs. company fleet cars
It’s crucial to draw a distinction between vehicle reimbursement programs and the provision of company fleet cars. Vehicle reimbursement programs are tailored for employees who utilize their personal vehicles for work-related travel, offering a fair and efficient way to compensate for the associated expenses.
This approach recognizes the diverse nature of today’s workforce, where remote work and flexible schedules often lead to employees relying on their personal cars for business-related journeys. On the other hand, company fleet cars are typically provided by employers, offering a different solution for specific business needs such as specialized transportation requirements or regular access to a vehicle for certain roles. These could include: first responders like police officers (who use squad cars), heavy equipment operators, transporters of refrigerated goods, etc.
While fleet cars might be beneficial for some, vehicle reimbursement programs cater to the broader spectrum of employees, including sales people and field technicians, acknowledging the practicality and cost-effectiveness of using personal vehicles for work-related purposes. The term “reimbursement” underscores the intent of compensating employees for the costs incurred while using their personal vehicles, emphasizing a fair and individualized approach to mobility solutions in today’s professional landscape.
1. Cents per Mile programs (IRS and CRA standard rates)
Cents per Mile programs operate on a simple principle – employees are reimbursed a rate in cents amount for each mile they drive for work. The beauty of this system is its tax-friendly nature. The Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA) have set standard rates that are considered tax-free. As long as the reimbursement doesn’t exceed these rates, employees can enjoy tax-free miles on their journeys. (NB: the CRA actually requires that the rate exactly match the suggested rate; figures above or below the CRA standard rate are considered taxable.) This program not only provides a straightforward way to calculate reimbursement but also offers a tax advantage, making it a popular choice for both employers and employees.
However, there are some drawbacks to the IRS standard rate, namely overpayment and underpayment. Check out this video where Mike Levine, President of Cardata, breaks it down:
2. Fixed and variable rate programs: balancing the equation
In contrast to Cents per Mile programs, Fixed and Variable Rate programs take into account both fixed and variable costs associated with driving. Fixed costs include expenses like insurance and registration, while variable costs encompass factors such as gas and maintenance.
This program requires a meticulous tracking of both types of expenses, providing a more detailed and accurate reimbursement. Employers may find this approach fairer, as it directly aligns reimbursement with the actual costs incurred by employees. However, the complexity of tracking these costs can be a challenge, requiring a robust system for accurate calculations.
To learn more about how FAVR software can streamline this process and take all the hassle off admin hands, check out this blog post next:
3. Accountable allowance programs: flexibility in reimbursement
Accountable Allowance programs provide employees with a certain allowance that is intended to cover all vehicle-related expenses. This approach offers flexibility in how employees use the funds. The key aspect that differentiates it from other programs is that employees must account for the expenses incurred, but then they are free to receive reimbursement in any style — via a simple CPM rate, a FAVR mixed rate, or even a simple flat rate car allowance. This accountability ensures that the allowance is used for its intended purpose — covering work-related driving costs. The IRS provides guidelines to ensure compliance in IRS Publication 463, making this program a flexible yet responsible option for both employers and employees.
To learn more about Accountable Allowances, this blog post is for you: What is an Accountable Car Allowance Plan? | Cardata
4. Fleets of company cars: navigating specialized terrain
While some companies may opt for maintaining fleets of company cars, it’s important to note that this approach is often more suitable for specialized vehicles like refrigerated trucks or those with specific business needs. Managing a fleet comes with its own set of challenges, including maintenance costs, insurance, and administrative overhead. Additionally, for a majority of businesses with employees utilizing standard personal vehicles for work purposes, navigating a fleet may prove unnecessary and financially burdensome.
In such cases, a well-structured vehicle reimbursement program stands out as a more flexible and cost-effective solution. It not only streamlines the process of compensating employees for their mileage but also offers a level of convenience and fairness that may be challenging to achieve with a fleet-based model. By embracing the appropriate vehicle reimbursement program, companies can strike a balance that aligns with their operational requirements while ensuring equitable compensation for their mobile workforce.
As the professional landscape continues to evolve, so do the ways in which employers support their mobile workforce. Vehicle reimbursement programs play a crucial role in acknowledging and compensating employees for their travel-related expenses. Whether it’s the simplicity and tax advantages of Cents per Mile programs, the detailed approach of Fixed and Variable Rate programs, or the flexibility of Accountable Allowance programs, each model has its merits.
Employers must carefully consider their organizational needs and employee preferences to choose the most suitable vehicle reimbursement program for their workforce. By doing so, they can ensure a fair and efficient system that benefits both the company and its employees on the road.