With so many Americans working remotely right now, many workers are putting fewer business miles on their vehicles than they did before the COVID-19 pandemic struck. Now is an important time to shore up your company vehicle reimbursement and make sure it accounts for less obvious vehicle expenses like auto insurance and depreciation.
What expenses does a mileage reimbursement cover?
When an employee uses a personal vehicle to carry out job responsibilities, that employee is hazarding a valuable asset in order to profit the company. This means that a company vehicle reimbursement plan should cover more than just the obvious travel expenses like gas, oil changes, maintenance, and tires. The costs of vehicle ownership like insurance, taxes, registration, and even depreciation should be reimbursed as well.
This is important to know because car insurance and depreciation on average combine for around 60 percent of the annual costs of owning and operating a vehicle. If a company's vehicle reimbursement policy does not sufficiently take these expenses into account, the employee could be left paying for expenses that rightly should be paid by the employer.
This deficit between expenses and reimbursement amounts could already exist if your company pays a standard mileage reimbursement, such as the IRS business mileage rate (57.5 cents per mile for 2020). Let's take a look at why mileage reimbursements don't always effectively cover fixed vehicle expenses like depreciation, insurance, registration, and taxes.
Why mileage reimbursements may not cover insurance and depreciation
When someone receives a cents-per-mile reimbursement for business travel expenses, they have to drive a certain number of miles per month in order to cover their total business-related vehicle expenses for that month. This number will vary based on factors such as how expensive gas prices are in that person's area, how much local mechanics charge for maintenance, and how pricy auto insurance premiums are in their state.
The more that person drives, the larger their reimbursement, and the more likely they are to fully recoup their vehicle costs or even secure a surplus. Two employees working for the same company can have very different experiences with the company reimbursement plan based on how many miles they drive each month. A low-mileage driver might be under-reimbursed, while a high-mileage driver might be over-reimbursed.
This discrepancy is primarily a function of vehicle ownership costs like insurance and depreciation constituting such a large portion of the average person's monthly vehicle expenses. If Driver A and Driver B live in the same county, drive similar vehicles, and carry the same auto insurance coverage, they should have roughly the same fixed costs. But if Driver A travels 500 miles per month and Driver B travels 2500 miles per month, Driver B's vehicle travel expenses (gas, oil, maintenance) will generate a much higher reimbursement amount, more than enough to cover the higher operational costs.
Simply put, if an employee does not drive enough, the employee's mileage reimbursement will not be enough to cover the reasonable business portion of their vehicle expenses. This issue is taking on a new prominence as a result of the decrease in travel during the COVID-19 pandemic.
Why COVID-19 should mean reevaluating mileage reimbursements
This season of reduced in-person sales calls and meetings with clients is a good time to reevaluate the effectiveness of standard mileage reimbursement programs. Because more workers than usual are in the low-mileage category, there's an increased likelihood that their vehicle expenses will not be fully covered by mileage reimbursements.
A better approach is to pay a fixed monthly stipend for the predictable expenses of depreciation, insurance, taxes, and registration and a smaller mileage reimbursement rate to cover the expenses tied directly to business mileage. This way, whether an employee is making fewer trips than usual or as many trips as usual, their reimbursement will always match their expenses.
The fixed and variable rate reimbursement – the fair approach
This stipend plus mileage rate approach can take many forms, but the most cost-effective and fairest version is the fixed and variable rate reimbursement, also known as FAVR. The key distinction for FAVR is that vehicle reimbursements are based on a standard vehicle across employees, rather than a standard mileage rate. This way, the company isn't subsidizing an employee's choice to drive an expensive vehicle, and the company also isn't benefiting from an employee's choice to drive a hybrid.
Another key distinction is that FAVR payments, both the fixed stipend and the variable mileage rate, are generated based on the employee's zip code. This way the regional variations in fuel, insurance, and maintenance costs are taken into consideration, producing a fairer reimbursement method.
To learn more about how FAVR works and why it is the most adaptable vehicle reimbursement approach in these unpredictable times, read our ultimate guide to FAVR reimbursement by clicking the link below.