In this article, we are focusing on employees who operate a personal vehicle in order to fulﬁll job requirements. If your organization issues company vehicles, then you are reimbursing a much narrower set of costs. For more information on how to properly administer a company car program, including a personal-use chargeback policy, check out our ﬂeet management tools.
When paying a car allowance or reimbursement to cover the use of a personal vehicle, the following expenses all must factor into your rate:
All of these expenses are geographically-sensitive, since different parts of the country experience different gas prices, insurance rates, property taxes, and maintenance costs. On top of that, several expenses depend on the type of vehicle an employee drives. Fuel efficiency signiﬁcantly impacts the amount of gas an employee uses, and a newer or pricier car will experience more substantive depreciation and higher insurance rates than an older or less expensive model.
So how do you accurately determine these expenses for each employee so as to guarantee sufficient coverage of expenses? That’s where data comes in.
Determining the ideal vehicle reimbursement policy for your organization takes time and thoughtfulness, but it can be done with the right data.
As we concluded in both of our ultimate guides (1. To car allowances, and 2. To vehicle reimbursements), a “one-size-ﬁts-all” approach will under-reimburse some employees and/or over-reimburse others. Accurately offsetting all employees’ vehicle costs will require you to account for
Two employees receiving the same mileage rate for two different territory sizes and locations may experience an inequitable difference in take-home pay. This reality is exacerbated if you are using the IRS mileage rate, which creates signiﬁcant inequalities between high-mileage and low-mileage drivers and promotes excessive driving.
Under a standardized mileage rate, high-mileage drivers see their ﬁxed costs (such as depreciation) spread out over a larger number of miles, allowing them to recoup these expenses more efficiently than a low-mileage driver. Working in a more expensive territory (e.g., California) will, however, reduce an employee’s take-home pay relative to a driver working in a less expensive part of the country.
A similar effect takes place when employees receive a ﬁxed car allowance, but this time high-mileage employees are the ones most likely to experience a gap between pay and expenses.
Unless you operate a very small company, adding up the vehicle expenses of individual employees is impractical. You need access to expense data for each expense type in relation to territory, location, and size. But before accessing this data, you need to take one crucial step.
Because employees are free to choose their own vehicles, they will experience differing fuel costs and rates of depreciation, insurance, and taxation relative to the fuel efficiency, age, and model of their vehicle. It’s not right for the company to cover the added expense of a gas-guzzling, expensive model like a Range Rover or a Hummer if a mid-size sedan will do.
So before deriving the expected expense data for each employee, make sure to group all employees based on the most appropriate vehicle for their role within the organization.
We have gathered comprehensive data from across the country to help companies optimize car allowances and mileage reimbursements. Using the chart below, you can get a rough estimate of the optimal monthly take-home pay that employees working in different parts of the country should receive. Keep in mind that, without knowing your employees’ speciﬁc work requirements and zip codes, it’s impossible to generate a precise expense estimate. So use the following chart as a general guide or tool to get you started – not as a substitute for a precise evaluation of employee expense needs.
For each of the following scenarios, we assume 1,250 miles driven per month.
As you can see, the cost of driving the same number of miles in the same vehicle can vary widely between different parts of the country. The underlying cost factors also vary. California has high gas prices, leading to high driving costs in San Francisco. Michigan has high auto insurance premiums, leading to high car ownership costs in the Detroit area.
The bottom line: If you have employees operating in different parts of the country, paying them the same monthly car allowance or the same mileage rate will lead to inequities and possibly violate state labor codes.
Remember that employees cannot write off business mileage or other vehicle expenses on their tax returns until 2026. This will make them more aware of gaps between their reimbursement amount and their expenses. If they work in a state with an expense indemnification code, they will be more likely to report a labor code violation or take the company to court.
As you begin to determine the expense needs of your employees to pinpoint the optimal monthly allowance or mileage rate, remember that IRS taxation procedures will affect your employees’ take-home pay. As long as your mileage rate does not exceed the IRS mileage rate, then you can pay a mileage rate tax-free. But a monthly car allowance is taxable unless you utilize an IRS-approved procedure such as mileage substantiation or the ﬁxed and variable rate allowance (aka FAVR reimbursement).
Taxes can easily reduce a taxable car allowance by one-third, so make sure to match the after-tax amount to the employee’s car expense data, not the pre-tax amount. Many companies conducting an exercise like this will decide that it’s time to jettison the taxable vehicle allowance and shift to a non-taxable program. We will explore below various non-taxable programs that mBurse can help your organization establish. Essentially, you can turn tax waste into better employee beneﬁts while saving money in the process.
If you pay a mileage reimbursement rate, it is vital to remember that even an optimized rate cannot protect your organization from inaccurate mileage tracking. Self-reported mileage is the Achilles’ Heel of mileage reimbursement. Many organizations use Excel spreadsheets or expense systems to record and calculate employee mileage. The employees often use Google Maps or some other calculation tool to estimate their monthly mileage, which they then report. However, this method carries several vulnerabilities:
In light of these vulnerabilities, it is vital to utilize an accurate mileage tracking program, ideally using a real-time mileage tracker that transparently records trip length without invading employee privacy. To learn more about mileage tracking options, read “Everything your business needs to know about mileage tracking.”
While undertaking the four steps we have outlined, you will likely discover that you need more precise expense data than you have time or resources to gather. There are three ways mBurse can help you generate accurate, defensible vehicle reimbursements. All of these solutions use a standard vehicle while customizing rates to speciﬁc zip codes where employees garage their cars.
You answer a set of questions about your employees’ locations, territory sizes, and job responsibilities, and we use our extensive data to give you optimized rates that will work for your current car allowance or mileage reimbursement program.
This option involves a more extensive optimization of your mileage rate. Based on your company’s goals and its employees’ territories and responsibilities, we develop cost-sensitive mileage rates for all employees. These rates adjust over time to reﬂect changing expense realities, allowing you to stay responsive to the volatile changes that can occur in gas prices, taxation, and more. mBurse will help you administer your program while integrating with your existing payroll and CRM software.
Read about how one company saved $635K annually with our Smart Mileage Rate.
The fixed and variable rate reimbursement is the most comprehensive solution available. Using your company’s particular goals and needs, we will design and implement a non-taxable reimbursement program that precisely addresses both the ﬁxed costs and variable costs of using a personal vehicle for work. Our FAVR vehicle program combines a ﬁxed monthly allowance with a variable mileage rate that tracks with changing levels of expense. The best part is that we do all the work of managing your reimbursement program while integrating with your existing payroll and CRM software.
Learn more about how fixed and variable rate reimbursement works.
As you consider the variety of factors in optimizing your organization’s car allowance or vehicle reimbursement rate, it may seem overwhelming—so overwhelming that you decide to just stick with the status quo and hope that the tax reform does not negatively impact your program. But consider the following possible consequences of a “wait and see” approach:
Our goal at mBurse is to help companies save money while reimbursing employees properly. We hope that this guide to rate optimization has been helpful, but if you would like a self-guided three-step process to assess, compare, and generate a free car allowance or mileage rate, you can get started below.