Sales reps are responsible for bringing business your way and securing long-term relationships with clients. To optimize sales, it is vital to provide a robust, sufficient vehicle reimbursement program, not a standard car allowance.
How to calculate a full vehicle reimbursement for sales reps
For sales reps who travel a lot using a personal vehicle, the expenses can add up quickly. It is important to understand how a driver incurs vehicle expenses in order to calculate an accurate reimbursement for the use of that vehicle.
The most common forms of vehicle reimbursement are a mileage rate (most often the IRS business rate) and a monthly car allowance – which is not actually a reimbursement but a stipend added to the salary. Both of these approaches have major shortcomings because they do not provide a way to accurately calculate an employee's reimbursable expenses.
Your sales reps incur vehicle expenses in two ways: through vehicle operation and vehicle ownership. To calculate an accurate reimbursement, you need to understand both types of expenses.
1. How to reimburse the costs of vehicle operation for a sales rep
The vehicle operations costs are the most obvious ones – gas, oil, tires, maintenance. These costs accrue in direct proportion to how many miles a rep drives. But they also depend upon market prices, which are particularly variable when it comes to fuel.
A standard monthly car allowance is not well-suited to offset these costs because the monthly amount does not depend upon how many miles the rep has driven or what gas prices currently are. A sales rep who covers a large territory and accrues a lot of miles each month will still get the same as a rep who covers a smaller territory. And a rep who works in California, where gas prices average $1–$2/gallon higher than the national average, will receive the same amount as other employees in less expensive states.
A mileage rate is better able to reimburse operational expenses because the reimbursement increases with the number of miles driven, just as these costs increase with mileage. However, a nationally-set rate like the IRS business mileage rate will not accurately reimburse operational costs in every place. This is because the IRS calculates its rate based on average costs, leaving reps in expensive locations under-reimbursed.
2. How to reimburse the costs of vehicle ownership
This set of costs is less obvious. Being required to use a personal vehicle for work means that the business percentage of the cost of ownership should be reimbursed. A good rule of thumb is 5/7 of the overall ownership costs, assuming a five-day workweek.
Ownership costs include auto insurance, depreciation, title/license/registration, and taxes. These costs are less variable than operational costs because they are depend more on time rather than miles driven (e.g. depreciation calculated on an annual basis, insurance on a bi-annual basis). The age of the car is the biggest factor in depreciation while the level of coverage, age of the car, and age and location of the driver are the main factors in calculating insurance premiums – miles driven is a minor part of the calculation.
Because these costs are relatively fixed, they are best addressed with a flat monthly payment like a car allowance. A mileage rate cannot accurately reimbursed the costs of ownership. A rep with a small but expensive territory will not drive enough miles per month to cover these ownership costs plus the operational costs. A rep with a large and inexpensive territory will be over-reimbursed because they will drive more than enough miles to cover their costs.
3. How to reimburse operational AND ownership costs for sales reps
If you could pay a monthly car allowance for just the ownership costs and a mileage rate for just the operational costs, that would be ideal. But there are two challenges: tax liability and obtaining accurate data.
Tax liability – A car allowance is considered taxable income unless some form of business-use substantiation is employed. A mileage rate is not taxable, as long as an IRS-approved mileage log is used and the rate does not exceed the IRS business rate of 65.5 cents per mile for 2023. So any plan that would combine an allowance and a mileage rate would need to use a method of accounting for business use of the allowance in order to avoid having to pay even more just to offset the tax liability.
Obtaining accurate data – It is not difficult to calculate an appropriate monthly allowance to pay for insurance, depreciation, and fees/taxes. This information is readily available for any make and model of a certain age garaged in a specific zip code. It is more difficult to calculate an appropriate mileage rate, which is why most organizations default to the IRS rate. Because different vehicles have varying fuel efficiency and different tire prices, it is important to use a standard vehicle across all reps to calculate a mileage rate. However, you still run into the wide variety of localized expense differences when it comes to fuel and maintenance.
The best way to provide sales reps with a full vehicle reimbursement
The fixed and variable rate reimbursement, also known as a FAVR car allowance, is a lesser known solution to the problems with calculating a fair reimbursement for sales reps.
A FAVR car allowance combines a monthly car allowance with a mileage rate, and all payments are tax-free. Many organizations exist that specialize in calculating the location-based costs for each driver and determine the appropriate monthly payment and mileage rate.
Reimbursing the operational costs with a mileage rate and the ownership costs with a fixed monthly payment is fair to the employee and the organization because it guarantees accuracy – as long as these expenses are calculated using localized data. All FAVR programs base rates on a standard vehicle chosen by the company, which also keeps things fair to all employees and the company.
In today's inflationary economy, it is vitally important to fully reimburse the vehicle expenses of the people building relationships with current and future customers. A FAVR reimbursement program can be a way to attract and retain talented sales reps and well worth the expense of outsourcing program management to a specialist.
To learn more about how FAVR could help your business boost sales, contact mBurse today.