Two Ways to Control Your Mileage Reimbursement Costs

Written by mBurse Team Member Nov 12, 2018 10:11:00 AM

A standardized mileage rate, such as the IRS rate, and employee-reported mileage both can make it hard to control costs—here’s how to fix the problem.

We are now well into the fourth quarter, a time when many organizations evaluate their budgets, expenses, and policies. It’s not uncommon for companies to find themselves in a conundrum when it comes to properly reimbursing employees for the use of their personal vehicles. The tension arises from two competing goals: 

  • Controlling vehicle reimbursement costs
  • Maintaining a simple reimbursement policy

The need to control costs is obvious, and the desire to keep the program simple is intuitive, but why do these two goals conflict? In a nutshell, different employees face different vehicle expenses based on territory-sensitive costs and overall territory size (i.e. mileage amount). High-mileage employees can cost the company a lot of money, but lower-mileage employees can also feel pressed to increase mileage in order to increase the auto reimbursement—all because the company has opted for the simplicity of a one-size-fits-all mileage rate with employee-reported mileage.

How much is a fair vehicle reimbursement

How to address the tension between cost control and simplicity 

These issues can be properly addressed either through a more accurate mileage rate or through better mileage tracking—or both. But most organizations need help to improve these policy areas. 

  1. Adopt a smarter mileage rate—NOT the IRS rate

Providing the IRS mileage rate keeps things simple. The IRS originally developed its mileage rate for use on individual tax returns as a business mileage deduction tool. The IRS rate soon began to be embraced by government agencies as a vehicle reimbursement rate, which then trickled down to corporations. Now the IRS mileage rate seems to have become the standard mileage rate in the corporate world. 

Organizations like the government mileage rate because it’s administratively simple. Employees record their business mileage, which is multiplied against the mileage rate. However, the government mileage rate is inaccurate for most drivers. Keep in mind that the government rate was not designed for accurate vehicle reimbursements—it was designed as an expense offset for taxes. For this reason, the IRS mileage rate tends to over-reimburse high mileage business travelers and almost always under-reimburses low mileage business travelers.

Several inaccurate cost components factor into the IRS mileage rate:

  1. Last year’s average vehicle costs across the country (dated and inaccurate for many)
  2. Last year’s average auto insurance premiums (dated and inaccurate for many)
  3. Average depreciation, based on 14,000 miles (inaccurate for many drivers)

Unless your employees are actually experiencing last year’s average costs, you are not accurately reimbursing employees using the IRS rate.

Low-mileage drivers in particular are acutely aware of the inequity of the government mileage rate and will accumulate or report the amount they believe will deliver a fair reimbursement. But mid-level and high-mileage drivers can also be motivated to drive extra miles to boost their take-home pay. Both under-reimbursement and over-reimbursement negatively impact your ability to control costs.

The best way to control costs is to provide a mileage rate that does not reward employees for driving more miles. Employees need a rate that is accurate and based on actual costs. The rate should be a break-even rate that adjusts each month with gas prices for each employee as well as the costs they experience within their territories.

Yes, this means using a different rate for each employee. But that’s the only fair way to reimburse all employees, since they each experience different costs. 

What about simplicity? Unfortunately, simplicity in this case becomes the enemy of your bottom line. However, this is why organizations like mBurse exist—to help businesses create and administer equitable and cost-effective auto reimbursement programs.

Mileage tracking guide

  1. Choose an accurate mileage tracker—NOT self-reported mileage

The second way to control costs is to use a mileage tracker that is accurate and reduces employee control over reported mileage. 

If you are paying the IRS rate, your employees have probably already noticed the inequity of the rate and acted accordingly. They can’t control the rate, but they can control the number of miles reported. They will seek to report the number of miles that provides them a rate they believe is fair, especially when gas prices and other expenses rise. When your employees control their mileage, they control their reimbursement amount as well as your costs.

We are not suggesting you become the mileage police—we are suggesting you automate as much of the mileage recording and calculating as possible. Using an Excel spreadsheet or an expense system for mileage reporting allows employees ultimately to decide how much mileage to report. We can almost guarantee that if you pay attention to the trends, you will see an uptick in mileage reported when fuel prices and auto insurance premiums increase. 

Instead, take immediate steps to use a mileage tracker that either captures mileage in real time or a tool that uses mapping to calculate the mileage. 

Conclusion: Protect Your Organization Now

The inaccuracies of your mileage rate and your mileage capture directly impact your auto reimbursement costs. We can’t stress enough the importance of using a mileage rate that does not over-reimburse your employees, but accurately reimburses employees. Arbitrarily making a number up will not help you in states with expense indemnification labor codes like CA, MA, RI, ND, SD or states that have experienced lawsuits related to employees not being reimbursed (MI, IL, NY).

Now is the time to address inadequacies in your mileage rate and mileage log.

What you need to know
 

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