Why Your Employees View Mileage Reimbursement as Compensation—and Why That’s a Problem
The 2019 IRS mileage rate just increased 3.5 cents to 58 cents-per-mile. Employee drivers will be happy, but the rate increase will not solve problems with using the IRS rate as a vehicle reimbursement method.
If you are paying the IRS mileage rate, you need to know that your employees see it more as compensation than as a reimbursement. And this is a problem that can significantly impact company costs.
Simply put, your employees will see the 2019 IRS rate increase as a raise. For the average driver, that increase of 6.42% will represent a raise of over $500 annually.
Let’s do the math.
The average mobile employee travels 15,248 business miles annually. Compare that employee’s annual reimbursements for 2018 and 2019:
2018 mileage rate ($.545/mile) – $8,310.16
2019 mileage rate ($.58/mile) – $8,843.84
One of the most important factors in the IRS mileage rate is gas prices. But will gas prices actually be higher in 2019 over 2018? So far, not at all! As of January 12, 2019, the average gas price across the country was $2.245/gallon. That’s significantly below the average gas price for all of 2018—$2.72/gallon.
Why the mismatch?
In a nutshell, the IRS rate represents an average of last year’s vehicle ownership and operation costs. The rate increased due to a nationwide average cost increase in three specific areas:
This basis for the rate unearths the first of the two fundamental problems with using the IRS rate to reimburse mobile employees:
Flaw #1: The IRS mileage rate cannot supply accurate or transparent reimbursements rates.
The IRS rate only delivers accurate results for drivers who fit the profile of last year’s “average” American driver. But within one organization you could have multiple drivers whose vehicle costs significantly exceed the average and multiple drivers whose costs lie well below the average.
The IRS mileage rate under-reimburses low-mileage drivers and over-reimburses high-mileage drivers. This has to do with the large percentage of fixed vehicle costs (depreciation, insurance, taxes, etc.) that will not fully be reimbursed until a driver reaches a certain number of miles.
Inaccuracies also arise because the rate is derived from last year’s costs. Gas prices increased throughout 2018 over 2017, affecting the increased IRS mileage rate for 2019. However, as of January 2019, gas prices have decreased significantly over the average 2018 prices. Because the IRS rate is not tied to current gas prices, it will always have a tendency to over-reimburse or under-reimburse unless gas prices remain flat (and they rarely do).
The IRS mileage rate was designed to be a tax deduction tool, not a vehicle reimbursement rate. It represented the maximum amount you could write off without substantiating business expenses. But it’s so convenient to use it for vehicle reimbursements that many companies throughout the U.S. use it to their detriment.
Flaw #2: Employees control their reimbursement and your costs.
Let’s talk about why employees treat the IRS mileage rate as a form of compensation. It’s a matter of incentive. The more mileage you drive or report, the more you will receive each month. Because the rate is not tied to current gas prices or employee productivity the company is at a loss.
Depending on how your company tracks mileage, your employees may not even have to drive more in order to give themselves a raise. Self-reporting can allow them to buffer their mileage or over-estimate it.
The bottom line is, a mileage reimbursement rate quickly turns into a form of compensation, but not a compensation for increased productivity. This is not a sustainable model if you want to stay in the black.
If you don’t take steps to control your costs, things can get out of hand quickly. But there are two things you can do to protect the company from the flaws of a mileage reimbursement rate.
- Switch to FAVR reimbursement.
Switch to a vehicle reimbursement policy that accurately reimburses employees based on their costs. The best one is the fixed and variable rate reimbursement, or FAVR. You will never over- or under-reimburse employees.
- Adopt a GPS mileage tracker.
Using a GPS-enabled mileage app will remove the controls of self-reported mileage. This will put an end to mileage buffering. But you should still check each employee’s mileage against their productivity.
If you don’t take steps to adjust either your mileage rate or your mileage log, you will perpetually remain at the mercy of the IRS rate and of employee behavior.
Remember, a mileage reimbursement is a reimbursement, not compensation. Don’t let your employees treat it that way.