With a significant portion of today's workforce working remotely, a responsive business vehicle program is essential. The secret is to start with a standardized vehicle, not a standardized rate. This guide explains how.
Quick Answer: How Does Standard Vehicle Reimbursement Work?
Standard vehicle reimbursement uses one company-selected vehicle as the cost basis for employee vehicle payments. Employees can still drive their own vehicles, but reimbursement is calculated based on the reasonable cost of owning and operating the standard vehicle for the job.
This helps employers avoid subsidizing each employee’s personal vehicle choice while still accounting for important cost differences such as location, mileage, insurance, fuel, maintenance, depreciation, registration, and taxes.
Why Is a Standard Vehicle Important for Fair Reimbursement?
Employees choose vehicles for many reasons, including family needs, personal preference, fuel efficiency, cargo space, comfort, or lifestyle. Those choices can create very different ownership and operating costs.
A standard vehicle helps separate the employee’s personal vehicle choice from the employer’s obligation to reimburse business expenses. Instead of basing reimbursement on whatever each employee chooses to drive, the company selects a reasonable vehicle or vehicle class that fits the role.
This creates a more consistent reimbursement foundation. The employer can then adjust for business-related differences that matter, such as employee location, business mileage, territory size, insurance costs, fuel prices, maintenance, depreciation, registration, and taxes.
How to Build a Reimbursement Plan Around a Standard Vehicle
To build a reimbursement plan around a standard vehicle, employers should choose a vehicle that reasonably fits the job, calculate the fixed and variable costs for that vehicle, localize those costs by employee territory, and then apply the correct reimbursement method.
The goal is not to force every employee to drive the same vehicle. The goal is to use the same reasonable cost basis so reimbursements are fair, explainable, and easier to defend.
1. Select a Standard Vehicle That Fits the Role
Start by choosing a vehicle or vehicle class that reasonably fits the employee’s job duties. A sales role may need a sedan or small SUV, while a field service role may require a larger SUV, van, or truck.
Employees may still drive a different vehicle if it meets company policy. However, the reimbursement should be based on the selected standard vehicle, not the employee’s personal preference for a more expensive vehicle.
2. Calculate Fixed and Variable Costs
Next, calculate the cost of owning and operating the standard vehicle. Fixed costs are ownership costs that exist whether the employee drives many miles or only a few. Variable costs increase as business mileage increases.
Fixed costs may include:
- Insurance
- Depreciation
- Registration
- Taxes
- License fees
Variable costs may include:
- Fuel
- Oil
- Tires
- Maintenance
Separating these costs matters because a single flat allowance or one national mileage rate may not reflect how vehicle costs actually behave.
3. Localize Costs by Employee Location
Vehicle costs vary by location. Fuel prices, insurance premiums, taxes, registration, maintenance, and repair costs can differ significantly from one region to another.
Employers should calculate the cost of the standard vehicle in the employee’s territory or garaging location. This makes reimbursement more accurate than applying one national rate to every driver.
4. Calculate Fixed and Variable Reimbursement Rates
Once the standard vehicle and localized costs are defined, employers can calculate the reimbursement.
A fixed payment can help account for ownership costs such as insurance, depreciation, registration, taxes, and license fees. A variable rate can help account for mileage-based operating costs such as fuel, oil, tires, and maintenance.
This structure is the foundation of FAVR, or Fixed and Variable Rate reimbursement. FAVR can support tax-free reimbursement when IRS requirements are met, and business mileage is properly documented.
How to Implement a Standard Vehicle Reimbursement Program
Once the fixed and variable cost assumptions are defined, employers need a process for capturing mileage, obtaining approval, reimbursing expenses, and conducting periodic reviews.
A strong implementation process should include:
- A written reimbursement policy
- A selected standard vehicle or vehicle class
- Fixed and variable cost assumptions
- Localized cost data
- Business mileage tracking
- Reimbursement approval workflows
- Annual review of fixed costs
- More frequent review of variable costs when fuel or maintenance costs change
Employers should also explain the program clearly to employees. The standard vehicle is not a requirement that employees drive that exact car. It is the cost basis used to calculate a fair business reimbursement.
Transitioning to a new vehicle reimbursement
The new program will be worth it for the accuracy, fairness, and transparency of the reimbursements. If you currently pay a standard car allowance, the savings of switching from a taxable to a non-taxable plan will be well worth it. If you currently pay the IRS mileage rate, eliminating costly over-reimbursements and labor-code-violating under-reimbursements will be worthwhile.
FAQs About Standard Vehicle Reimbursement
What is a standard vehicle in reimbursement?
A standard vehicle is a company-selected vehicle or vehicle class used as the cost basis for calculating employee vehicle reimbursement. Employees may still drive their own vehicles, but reimbursement is based on the reasonable cost of the standard vehicle.
Why use a standard vehicle for reimbursement?
A standard vehicle helps employers avoid subsidizing personal vehicle preferences while still accounting for business-related cost differences such as mileage, location, fuel, insurance, maintenance, depreciation, registration, and taxes.
Does a standard vehicle mean employees must drive that vehicle?
No. Employees can generally drive a different vehicle if it meets company policy. The standard vehicle is used for reimbursement calculations, not as a mandatory vehicle assignment.
What costs are included in standard vehicle reimbursement?
Standard vehicle reimbursement may include fixed costs such as insurance, depreciation, registration, taxes, and license fees, as well as variable costs such as fuel, oil, tires, and maintenance.
How is standard vehicle reimbursement different from the IRS mileage rate?
The IRS mileage rate is one national cents-per-mile benchmark. Standard vehicle reimbursement can use a specific vehicle, localized cost data, and employee mileage patterns to create more accurate reimbursement rates.
Is standard vehicle reimbursement part of FAVR?
Yes, a standard vehicle is a key part of FAVR reimbursement. FAVR uses standard vehicle, fixed, and variable costs, location, and business mileage to calculate reimbursement.
But you may find that these challenges exceed your organization's available resources. mBurse can supply the data you need. We can also assist you in calculating your rates and drafting your new policies. We can even administer your program on your behalf. Schedule an exploratory call today or get a cost comparison below.
