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.
If an organization has workers who drive as part of their jobs, they may elect to have those workers use their own personal vehicles. The most common programs to manage those personal vehicles are car allowances and cents-per-mile reimbursements.
As established in a previous post, paying an equal car allowance or mileage rate to employees is unfair because different employees incur vehicle costs at varying rates based on their location and mileage driven. A fair vehicle reimbursement has to be calculated with those variations in mind. However, costs associated with vehicle choices should not factor into this calculation.
Workers pick their vehicles for a myriad of reasons – the thrill of a sports car, the utility of a full-size pickup, the environmental impact of a hybrid. That choice affects the vehicle's operating cost due to differences in fuel costs, tire costs, and other factors.
By standardizing the vehicle used to calculate company reimbursements, the organization starts everyone on an equal footing before considering the expense needs specific to each person's role (i.e., territory-based costs and mileage-based costs). This approach also eliminates arguments that the rate or allowance is insufficient, as these often come from employees who drive expensive vehicles.
When using a standard vehicle, all reimbursement amounts will be based on the cost of acquiring and operating that specific vehicle in the specific geographic area where each driver is located. To create an auto reimbursement plan based on a standard vehicle, follow these steps.
For a sales rep, that might be a mid-sized sedan such as the 2023 Chevy Malibu or 2023 Nissan Altima. For someone who needs to transport people comfortably, a minivan or SUV might be the ideal choice. It all depends on the job's requirements. If there are multiple roles within the organization that require a vehicle reimbursement, you may have to select more than one standard vehicle.
Remember, however, that employees will still be allowed to drive the vehicle of their choice, as long as it complies with the company's rules. A person who wants to drive the full-size pickup they use to pull their fishing boat on the weekends can still drive that pickup; the extra gas expense over the standard vehicle just won't be subsidized by the company.
Find out what it typically costs to own and operate that particular vehicle. It is essential to categorize costs into two main categories: fixed and variable. The fixed costs – including insurance, depreciation, registration and fees, and taxes – are relatively easy to obtain. The variable costs – gas, oil, tires, maintenance – require more calculation.
If most of the employees are working within the same region, you can actually just focus on the costs of owning and operating that vehicle for that region. However, if employees live and work in various locations, the next step will be crucial.
For each region in which employees operate, you'll need to calculate the increase or decrease in costs compared to the average. This is particularly important for insurance rates and gas prices, which can vary widely by region. (Just compare the average annual auto insurance premium in Michigan, $4,141, vs. Ohio, $1,291.)
These first three components – standardizing the vehicle, separating fixed from variable costs, and determining geographical costs – are the key ingredients to delivering an accurate, equitable, and transparent reimbursement to each employee. These three steps, taken together, correct the flaws of standard plans, such as equal car allowances and mileage rates.
First, calculate the fixed annual costs for the standard vehicle garaged in the employee's zip code, driven at the expected number of miles they drive. Add up the annual estimated fixed costs, divide by 12, and then multiply by the percentage of time appropriately considered business use (often this is .71 or 5/7, assuming a five-day workweek). That's the monthly fixed amount an employee should receive.
For variable costs, develop a mileage rate appropriate for each employee. The simplest way is to add up the annual value of those variable costs for the standard vehicle in each employee's location, driven at a certain expected number of business miles. Then divide that number by those miles. For example, an expected annual cost of $5,000 for gas, oil, tires, and maintenance, spread over 15,000 miles, would yield a rate of $ 0.33 per mile.
Once you know what the monthly fixed allowance and the mileage rate for each employee should be, it is simply a matter of tracking their business mileage and paying a monthly amount that equals fixed allowance + (mileage rate x business mileage). Management reviews the fixed allowance amount annually and the mileage rate every few months, making adjustments as needed.
There are several challenges to implementing and administering this type of plan, which the IRS refers to as a fixed and variable rate car allowance, also known as FAVR reimbursement. These challenges include
The new program will be worth it in terms of the accuracy, fairness, and transparency of the new 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, the elimination of costly overreimbursements and labor-code-violating underreimbursements will be worthwhile.
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.