When it comes to providing a car allowance or reimbursement to employees, it is important to craft a financially sustainable plan. Here are five ways to achieve accurate reimbursements without cost overruns.
5 Steps to a Cost-Effective Car Reimbursement
Your current car allowance or reimbursement plan may already include some of these characteristics of a cost-effective program. In order to fully achieve the goal of financial sustainability, you will most likely need to adopt all five.
The most cost-effective plan is an accurate plan. The challenge is that different employees incur different levels of expense. Consequently, accurate reimbursement means some level of customization. How do you achieve it?
1. Avoid taxes on any car allowance or reimbursement
If you currently have a taxable plan, switch to a non-taxable plan. Taxes can eat up 40% or more of an employee's car allowance. And the company is paying payroll taxes on top of that amount, since the car allowance is treated as compensation by the IRS.
By repurposing money going to taxes, you free up resources to boost employees' vehicle benefit while reinvesting in the organization. Non-taxable plans include mileage reimbursement at the IRS business rate or less, a car allowance with mileage substantiation, and fixed and variable rate reimbursement, also known as FAVR.
2. Base your new rates on vehicle expense data
In order to generate accurate car reimbursements, you have to get access to localized data. Different parts of the country experience different prices. California and Illinois have high gas prices. Florida and Michigan have high insurance premiums. Employees based in South Carolina or Texas may not need to be paid at the same rate as employees in these other states.
Your organization can do its own research into the relative levels of costs in each of the places where employees are based. Or you can purchase that data from third-party data specialists. Once you have that data, you can adapt your base rate up or down based on an employee's location. But, as a matter of fairness, generate your base rate using a standard vehicle for all employees, regardless of what they actually drive.
3. Automate mileage capture and reimbursement
All non-taxable car reimbursement plans require substantiation of business use of the vehicle. The most common way to substantiate business use is through a mileage log. Today's mobile apps that capture mileage using GPS are the simplest, most administratively convenient mileage logs. By automating mileage capture you save employees time and reduce the likelihood of overestimations in mileage reporting and of mileage fraud.
But don't stop there. Automate the reimbursement process as well. By picking a mileage capture app that integrates with your expense and reimbursement system, you can reduce time spent on administrative tasks. Even better, pick a mileage app that integrates with your company's CRM, which will help automate the process of collecting customer and sales data.
4. Leverage reimbursement to reduce hidden costs
One less obvious area of cost related to mobile employees is the risk of liability for accidents. An employee with insufficient auto insurance can cost a lot of money if an accident occurs on the job. By requiring employees to periodically upload proof of sufficient insurance (as dictated by the organization) in order to receive their reimbursement, you reduce liability.
Another way to make your reimbursement plan more cost-effective: Use trip data of the most productive employees to train less efficient employees. If you have adopted a mobile app for mileage capture, this process is relatively easy to set up.
5. Reimburse vehicles based on how they incur costs
Because some employees drive more than others, they incur costs at different rates. Standard car allowances and mileage rates cannot accurately address this discrepancy. Low-mileage drivers and high-mileage drivers still incur similar levels of fixed costs like auto insurance premiums, depreciation, and taxes, license, and registration.
A low-mileage driver may not be able to drive enough to cover all these fixed costs in addition to driving costs if they receive a mileage rate. And a high-mileage driver might incur costs beyond what a standard car allowance pays. The solution is to reimburse costs the same way they are incurred.
In other words, you determine the monthly fixed costs for each driver (based on location, as seen in #2). You pay that amount each month no matter what. The costs incurred by driving (fuel, oil, tires, maintenance) you reimburse with a cents-per-mile rate. This is exactly how a FAVR reimbursement plan works.