As vehicle expenses increase, employees may complain that their car allowance isn't enough. Some employers may try adding a fuel card or fuel reimbursement. Others may switch entirely to a mileage reimbursement or a fixed and variable rate car allowance (FAVR).

FAVR vs fuel card - What is best?

If your organization is considering adding to your car allowance program, what's the best way? Let's explore the benefits and drawbacks of each approach.

Benefits of a fuel card

A fuel card is a simple way to increase a car allowance benefit. If you're already paying a car allowance, adding a gas card is an incremental approach. The allowance covers most of the vehicle costs, but the company buys gas for the employees who drive personal vehicles for their jobs. Employees feel more valued and can see directly where the money goes.

Drawbacks of a fuel card

Managing a fuel card program can become complicated and expensive. This is because drivers will want to use some of that fuel for personal trips. The problem is, personal use both costs the company and makes the fuel expenses taxable income. To avoid these costs, management must institute a mileage tracker to prove business use. It is also wise to set rules about when employees can purchase gas and how much.

Benefits of FAVR

A fixed and variable rate car allowance would replace the current car allowance and make a fuel card unnecessary. Costs of fuel (based on mileage) would be factored into regular payments. Unlike a car allowance or fuel card, all FAVR payments are tax-free. Over time, a FAVR program will save a lot of money compared to a car allowance combined with a fuel card.

Drawbacks of FAVR

Adopting a FAVR allowance would be a more radical approach. The main drawback is its administrative complexity. This approach requires access to expense data and proof of business use for vehicle expenses. This means supplying drivers with a mileage tracker and hiring a third party to generate rates and manage payments.

In-depth: why FAVR is better than adding a fuel card

Though FAVR involves more challenging administration, it will almost always save significant sums compared to adding a fuel card to a car allowance. The key distinction is that FAVR is a tax-free approach to boosting an employee car allowance. Let's explore the two options in depth.

Option 1 - Car allowance with gas card

Adding a fuel card or reimbursement to an existing monthly car allowance is simple at first. You give employees a credit card for gas purchases or reimburse them for gas station receipts. That approach is easy to understand. But it's not as easy to administer as it sounds.

A standard car allowance is considered taxable income by the IRS. The same can also prove true of a gas card – unless you're willing to have employees track their business mileage to prove that the card is used only for business expenses.

But this is a personal vehicle, so some of that gas incidentally will be used for personal errands. There's still going to be gas in the tank after hours and on weekends. According to IRS rules, you have to either tax the portion for personal use or charge employees back for that portion.

This gets complicated, so maybe it's easiest to keep everything taxable and not expend administrative resources on proving business use. But now you're providing a perk that subsidizes personal fuel use. How do you ensure that the added costs do not increase uncontrollably?

Controlling the costs of a gas card or reimbursement require additional rules of use, such as monthly caps or weekly restrictions on which days employees can buy gas. 

Option 2 - FAVR vehicle plan

Similar to mileage reimbursements at or below the IRS business rate, FAVR car reimbursements are non-taxable. However, the problem with a typical mileage reimbursement is uncontrollable costs—the more employees drive, the bigger their reimbursement.

FAVR, however, provides cost control because it precisely reimburses all vehicle expenses. This is what makes this policy non-taxable. Also, while mileage is factored into the payment, it constitutes a lesser portion of the reimbursement, decreasing the incentive to drive extra miles in order to maximize payments. 

How FAVR pays for gas and other costs

Fuel is a variable expense – it rises and falls with miles driven and with gas prices. Other vehicle costs work differently. These are fixed costs that generally stay the same from month to month. Examples include car insurance, value depreciation, registration, and taxes.

Paying for employees' gas on top of a fixed monthly allowance acknowledges that these two types of expenses operate differently. But what sets FAVR apart is the use of data to reimburse both types of expenses precisely and tax-free.

Using expense data for a company-selected vehicle garaged in a specified zip code, a FAVR plan generates both variable and fixed rates of payment for each employee. The fixed rate is a set payment just like a standard car allowance. The variable rate is a cents-per-mile rate that adjusts with gas prices. Both payments are accurate and tax-free.

Why FAVR is a non-taxable IRS plan

Unlike a standard car allowance plus a fuel card or reimbursement, fixed and variable rate reimbursements are tax-free. The IRS publishes each year a set of guidelines for properly administering a FAVR vehicle allowance. Following these rules keeps all payments non-taxable.

The basic distinction between accountable and non-accountable comes down to proving business use. As we saw above, trying to prove business use of fuel can get very complicated. With FAVR, employees use a GPS mileage apps to keep mileage tracking quick and simple. By basing all payments on localized expense data, the employer demonstrates that payments are reasonable reimbursements and not perks.

In order to properly operate a FAVR vehicle plan, most organizations opt to involve a third-party administrator. Outsourcing tends to be a more cost-effective approach than paying a car allowance plus fuel.

Car allowances, gas cards, and taxes

The Achilles heels of car allowances and gas cards are tax waste and uncontrollable costs. Employees lose 30-40% of their allowance to taxes—a huge chunk that would literally pay for their gas for the month. So why pay directly for the gas, an expense that will become uncontrollable without serious restrictions? Why not convert that tax waste into a payment that covers both gas and other vehicle costs?

Why FAVR is better than paying for gas

By instituting an IRS-accountable, tax-free vehicle allowance, you take that money going to taxes and re-invest it in employees and the company's mission. No one gets under-reimbursed or over-reimbursed because the payments are precise. Most employees will see a boost in their allowance. 

The company also saves many because it no longer pays payroll taxes on the car allowances – and you avoid the redundant expenditure on employee gas. A FAVR allowance does not add administrative time because the savings are enough to outsource the program.

Schedule an exploratory call to learn more about FAVR plan administration, or use the calculator below to see how much your business could save by switching to FAVR.