Wondering what portion of your mileage reimbursement rate should cover fuel costs? There is a way to calculate it and help determine whether your reimbursement rate can handle the recent spikes in gas prices.
Many organizations provide a mileage reimbursement or car allowance for their employees but are unsure how much gas plays a part in the amount. By the same token, many employees wonder whether, in times of high gas prices, their reimbursement rate or allowance adequately accounts for fuel costs.
Adding a separate gas card or fuel reimbursement is NOT the way to deal with sudden increases in gas prices. This approach adds a set of complications that only grow more costly with time.
One of the big problems with offering a fuel card or reimbursement is variations in fuel efficiency among different vehicles. That means some employees will necessarily get a bigger benefit per mile than others because they drive vehicles with poor gas mileage.
This same variation in fuel efficiency makes it challenging to calculate gas costs as a portion of a company mileage reimbursement rate. That number will differ from employee to employee based on both how many miles per gallon their vehicle gets, how much they drive, where they live (i.e. traffic, terrain, weather), and what their gas prices are.
The fact is, you cannot calculate the gas portion of a company-wide mileage rate or car allowance. You can only calculate the amount for individual employees. Because of this, you are guaranteed to have a company-wide rate that misses the mark for some employees – or at least misses the mark from the employee's perspective.
The reality is many employees drive vehicles that may be overly suitable for business. One employee may drive a large pickup truck for work because they tow a boat on the weekends, but may only need a sedan or small pick-up to get their job done. The same employee will expect you to cover their costs to own/operate the large pickup.
On the other hand, you could have employees who drive electric vehicles or extremely fuel-efficient vehicles. Your reimbursement may be more than adequate for them in terms of the fuel portion. Clearly there is an inequality here that requires a more sophisticated reimbursement approach.
The key is a different approach to standardization. That is, not starting with a standard allowance amount or mileage rate but instead starting with a company-selected standard vehicle on which to base the gas portion of the mileage rate or allowance, no matter what vehicle the employee actually drives.
A standardized methodology helps ensure fairness. It is also essential to provide up-to-date data related to gas prices. A gas mileage rate must adjust each month for each employee if it is to be truly accurate. Only in this way can the rate be fair.
At mBurse, this is how we calculate the gas mileage rate. We start with a company-selected standard reimbursement vehicle to generate the rate. This is fair for all employees, who drive various types of vehicles (fuel-efficient or non-efficient). We establish an MPG for each employee based on that standard vehicle combined with their traffic, terrain, and weather. Then we divide the MPG by the fuel costs, updating the fuel price factor each month for their location.
For example, if the standard reimbursement vehicle gets 22.5 mpg and the gas prices are $5.50/gallon, we calculate the gas rate to be $.2444/mile. Keep in mind that this number does not consider the maintenance, tires, or other costs of owning the vehicle (insurance, license/registration, ad valorem or personal property taxes, or depreciation). Also, keep in mind that not all employees will get 22.5 miles per gallon for the standard reimbursement vehicle based on traffic, terrain, and weather.
If you have employees in the Snowbelt they will have a different MPG than those in the Sunbelt. If the employees cover mountainous terrain, they will have worse MPG than those driving on flat terrain. If an employee lives in a low traffic area, they will get better MPG than one living in a high traffic area. Adding to the complexities of getting the reimbursement rate “right” are the everchanging gas price changes, which lie beyond everyone’s control.
As you can see, it is complicated to measure the gas portion of a mileage rate and impossible to generate a single company-wide rate that fairly takes into account every employee's necessary fuel costs. Instead, you need a sophisticated program that uses a standardized approach to account for multiple variables related to each driver's fuel needs.
The best approach is to partner with a company like mBurse that has the standard methodology and strength of data and is focused on professional reimbursements. This will allow your organization and employees to focus on what matters most – your business and its mission.