The modern workforce is changing as it’s transforming to becoming more mobile. From small business owners who support a few remote employees to sales managers who oversee an entire mobile workforce, many employers around the world now rely on employees who drive their personal vehicles to conduct business. Most organizations are unaware of all the vehicle programs companies can use to reimburse their mobile workforce. Before making a decision on which program is right, companies should explore the benefits and drawbacks of every option available. The most common types of vehicle programs include a flat car allowance program, a mileage reimbursement program, and Fixed and Variable Rate Reimbursement (FAVR) programs. Here are the differences:
Flat Car Allowance
With this vehicle program, companies provide a flat rate (often per month) to compensate employees for using their vehicles – for example, $300 per month. Unfortunately, car allowances are frequently viewed as a perk. This is inaccurate and can cost organizations more than they anticipate. A flat car allowance involves a single, company-wide rate that is used to reimburse all employees for any business travel. Not only is it not flexible enough to reimburse all employees fairly, it also either underpays or overpays workers depending on where they live and the costs each incurs. While this used to be a popular method of reimbursement, it’s lack of flexibility of not tracking mileage makes other vehicle programs stand out. Furthermore, flat car allowances are subject to both Federal Insurance Contributions Act (FICA) taxes and income taxes. This means providing a flat car allowance of $300 costs an organization $322.95 after payroll taxes since the employer pays 7.65% for FICA + Medicare, while employees take home a fraction of the full car allowance. For example, an employee in the 24% tax bracket would only take home about $205, once income taxes, FOCA and Medicare are subtracted.
With this program, companies reimburse mobile workers for business travel in their personal vehicles at a fixed cents-per-mile rate. Normally, this amount is based on the IRS standard mileage rate. While this is easy to implement and when IRS guidelines are followed allows employees to receive tax-free reimbursements for miles traveled, it does have disadvantages. Much like a flat car allowance, reimbursements do not take into account geographic differences in the prices of fuel. In addition, the program tends to over-reimburse employees who drive many thousands of miles per year. This encourages faulty driving practices and exposes companies to potential mileage fraud. That said, this method can be a viable option for businesses whose mobile workforces–consultants, sales associates, technicians, etc.—don’t drive a lot (under 5,000 miles each year).
2. IRS Business Mileage Rate
The IRS business mileage rate is a guideline for mobile worker reimbursement. While employers can use this in conjunction with cents-per-mile programs, it is actually only recommended to be used as a tax accounting tool. While paying the IRS mileage rate can allow reimbursements to be paid tax-free, it is far from perfect and tends to fluctuate from year to year. There are a number of factors that go into the IRS mileage rate, all involving driving expenses. Increases in the rate are generally driven by:
- Increased vehicle maintenance costs
- Rising fuel costs
- Higher insurance rates
- Changes in vehicle costs
For example, the 2019 IRS mileage rate is 58 cents per mile. That’s up from the 54.5 cents of 2018. This means an employee who drives 10,000 miles each year would be reimbursed $350 more this year. However, a dip in fuel pricing over any point during the course of the year may result in employees spending less at the pump.
Company-provided (Fleet) Vehicle Program
With a fleet vehicle program, companies provide their mobile workforce with a leased or company-owned vehicle. Company-provided cars (fleets) can be a great option for companies that require specialized vehicles, but they come with steep challenges. One of the biggest obstacles? The cost of personal mileage on a company-provided vehicle. While employees are using the vehicle to perform their job duties, they also need to make personal stops like running an errand or dropping off their kids at school. While accurately calculating mileage can be tricky, there are plenty of solutions that can overcome the obstacles that fleet programs bring to the table. Furthermore, with fleet programs, the company providing the car is typically liable for accidents 24/7. This means a company will assume a substantial amount of risk during non-business hours and over the weekend if the employee chooses to drive the car then.
A FAVR reimbursement program is the most comprehensive and flexible of all of the vehicle program options available to employers. Unlike one-size-fits-all car allowance or cents-per-mile reimbursement programs, a FAVR program reimburses employees using a fair and accurate approach: fixed and variable costs. Fixed costs are constant month over month and include things like insurance premiums, license and registration fees and taxes and depreciation. Variable costs vary month over month and are based on number of business miles driven. They include things like gas, oil, maintenance and tire wear. By reimbursing employees based on how much they drive and where they drive, businesses can ensure that they are accurately compensating them based on the true cost of operating their vehicle.
Companies who have mobile workers are continuously faced with the task of providing easy, efficient and effective vehicle programs. While each company has a different way of going about reimbursement methods, it’s important to consider the pros and cons of each of these five methods before compensating their workforce.