The CFO’s Guide to Vehicle Reimbursements
The financial impact of a vehicle reimbursement goes well beyond the travel and expense category of your operating budget. This guide will identify less visible costs and offer ways to save.
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Introduction
What is vehicle reimbursement costing you?
No matter the industry or mission of your organization, employee vehicle travel constitutes a massive expense. Whether you pay a car allowance, reimburse mileage or fuel, or operate a fleet of company vehicles, your budget must contend with expected, up-front, incidental, less visible costs.
Determining the overall cost of your employees’ vehicle travel is not as simple as adding up the monthly car allowance payments, mileage reimbursements, or fleet expenses. Each approach to paying employees’ business travel expenses creates a financial ripple effect.
The hidden costs of a vehicle reimbursement
- An insufficient car allowance can contribute to productivity losses or turnover.
- A mileage reimbursement can incentivize unproductive driving or mileage overreporting (i.e. “mileage fraud”).
- Fuel reimbursements and company vehicles may subsidize personal use without a tight charge-back system.
- Other hidden costs: tax waste, inefficient mileage logs, labor code violations.
The guide you need
The following guide will equip you to review and overhaul your car allowance or vehicle reimbursement policy in order to cut costs and set your organization on course for a sustainable and optimized vehicle program.
If you currently offer company vehicles to employees, you should instead read our guide to transitioning some or all of your employees away from company vehicles.
Taxable compensation vs. non-taxable reimbursement
IRS tax rules for vehicle reimbursement
If your organization pays a car allowance or offers a fuel card without substantiating business use, those payments are taxable. Your organization should withhold taxes from employees who receive these payments, treating them like you treat a salary.
The number one way to cut costs in a taxable program is to switch to a non-taxable program. It is that simple.
The distinction the IRS makes between an accountable and a non-accountable plan is the key to determining tax liability. In the case of an accountable plan, all payments are issued as reimbursements. The organization follows an accounting procedure to demonstrate that all payments went to pay for business use of the vehicle or fuel.
Typical accounting procedures used to keep a vehicle plan untaxed
An organization may adopt one of these methods to keep payments tax-free:
- IRS-compliant mileage log to support an IRS-approved mileage rate
- Mileage substantiation for a car allowance (also known as a “mileage allowance”)
- FAVR reimbursement based on standard vehicle cost data
- Personal use chargeback policy for fuel card or company vehicle
The Power of Eliminating Tax Waste
By switching from a standard, taxable car allowance to a non-taxable reimbursement plan, you can save money while improving most employees’ take-home amounts. The math is pretty simple.
If a driver receives a $600/month car allowance after withholding income taxes and payroll taxes, that allowance will likely be $400 or less.
On top of that, your budget is also getting hit for the employer portion of the payroll taxes, or $45.90 per employee per month.
By adopting an IRS-compliant accounting procedure, you can reinvest that $246+ into your employees as needed and into other parts of your operations budget.
What are the costs of switching from a taxable car allowance to a non-taxable plan?
You lose the simplicity of your current program and add some administrative tasks. But cost-effective solutions exist:
- automate your mileage capture/reporting
- outsource your program administration to an affordable vendor.
The high costs of turnover
Car allowances and reimbursement plans can cause turnover
Vehicle prices, gas prices, and insurance rates can rise rapidly and expose employees to costs that far exceed their car allowance. This is especially true if an employer does not regularly update the allowance amount or offer extra to employees operating in expensive parts of the country like California.
Mileage reimbursements can also produce situations where employees need more reimbursements to cover their costs. Because a mileage reimbursement program requires employees to drive a certain number of miles per month before they hit break-even on costs, low-mileage drivers can end up under-reimbursed.
Mileage reimbursement math
At the 2024 IRS rate of 67 cents per mile, a worker who drives 500 business miles per month will receive $335.00. According to AAA, let’s compare that with the average annual cost of owning and operating a mid-size sedan in 2022. That number was $8,643, or $720.25/month. Multiply that by 5/7, assuming a five-day workweek. The expected cost is $514.46, significantly more than the $327.50 reimbursement.
But it’s not just low-mileage employees that can get shortchanged. The IRS mileage rate is based on average costs nationwide. So, a mid-mileage business traveler (1,000 monthly business miles) in an expensive state like California could also find the mileage rate insufficient.
The actual costs of turnover
It is estimated that to replace a highly skilled employee will cost 1.5 to 2 times their annual salary. This makes sense when you consider the direct and indirect costs that result from one employee’s departure:
- Loss of productivity just before and after the employee leaves
- Reduced productivity during the early months of the replacement's work
- Loss of quality to product or customer relations
- Advertising for the open position
- Time and energy spent recruiting and interviewing candidates
- Background checks, verifications, and other services required by HR
- Time and energy spent during the onboarding and training process
These expenses add up. The most invisible ones are the costs related to remaining employees or whole departments getting compromised by operating shorthanded or working overtime. For far less than the cost of that employee’s salary, you can update your car allowance or mileage reimbursement and retain that employee and others.
Reimbursement Rate Optimization
The need for an optimized car reimbursement rate
Both car allowances and mileage reimbursements can also be prone to overpaying some employees. The most significant risk comes from drivers who cover large territories, especially in relatively inexpensive locations.
An employee who accrues 2,000 business miles monthly will receive a whopping $1,310. Once the employee has driven enough miles to cover fixed vehicle costs (insurance, depreciation, taxes, license, registration), the mileage quickly overtakes the operational costs (fuel, oil, tires, maintenance).
At some point, that employee begins making money off of the reimbursement. This is because, at a certain point, the fixed costs remain fixed and only increase negligibly with additional mileage.
If your organization has yet to optimize its reimbursement rate based on the locations and mileage amounts of your employees, chances are that some employees are getting over-reimbursed while others are not getting reimbursed enough. You can be overpaying some employees while pushing others out the door.
Delivering an optimized reimbursement rate
In order to deliver an accurate reimbursement rate for all employees, you need data. You need to know what a reasonable reimbursement would be for a range of employees, given the variations in territory sizes and location-based costs.
An employee based in New York faces an average annual cost of $4,769 for full auto insurance coverage. For an employee based in Ohio, that number is only $1,112 (Source: Forbes Advisor.) At any given time, gas prices in California tend to run $1 to $2 above the national average.
These location-based cost differences are significant, and your reimbursement rate must take them into account if you have employees working in different states.
Neither a standard car allowance or a standard mileage reimbursement takes location-based cost data into consideration.
Obtaining that data can be time-consuming. But there are companies you can pay to provide it, saving significant administrative time and helping you craft a more accurate and cost-effective policy. The key is to obtain data based on the most reasonable vehicle for the job, such as a mid-sized sedan or an SUV crossover, if the job does not require a particularly large vehicle.
The bottom line is that, by optimizing your reimbursement rate, you will retain talented employees and avoid cost overruns due to over-reimbursements.
Choosing a cost-effective mileage log
IRS compliance and self-reporting
To operate a cost-effective reimbursement plan, you need a cost-effective mileage log. This easily overlooked tool can save significant money and even bring additional return on investment.
An accountable car allowance or reimbursement requires an IRS-compliant mileage log. However, many organizations use mileage logs that inflate company costs, negating some of the savings from offering a tax-free plan.
Compliant mileage logs can include spreadsheets (Excel, Google, etc.) and expense reporting systems, but these involve self-reported mileage.
When you pair a mileage reimbursement with a self-reported mileage log, you facilitate mileage buffering or even outright mileage fraud. It can be tempting for employees to “round up” or add extra miles, since each mile reported increases the reimbursement. It can be very difficult for busy managers to determine whether the reports they approve contain extra mileage.
GPS-based mileage tracking apps
The solution is to adopt a mileage capture system that does not rely on self-reporting. GPS-based mobile apps now exist that automatically track mileage in real time and later upload it into the company expense system. Integrating the mileage capture with the expense system allows for easy payment/reimbursement processing.
For the employee, the ease of use is attractive, eliminating the time-consuming task of recording and reporting mileage. For the employer, the accuracy and accountability is a welcome check against uncontrolled costs. The trip data provided by the app can also be analyzed and used to enhance training and coaching in order to increase efficiency and productivity.
CRM integration and privacy protection
Adopting a mileage app that integrates with existing CRM software can bring additional benefits. Automating the uploading of trip and customer data from the app into your CRM increases the chance that your organization can make full use of these data.
Make sure the mileage tracking app you choose places a wall between the employee’s whereabouts and the employer’s knowledge in order to protect privacy.
Recording trip data in real time does not mean reporting it in real time. Employees should have the opportunity to edit out non-business-related locations and trips as needed. With privacy concerns at an all time high, it’s important to strike the balance between the employee’s right to privacy and the employer’s right to accurate mileage.
Conclusion: The most cost-effective
vehicle reimbursement
You can adopt any one of the recommendations in this guide, and it will bring savings and make your vehicle reimbursement more cost-effective. You can also consider a vehicle reimbursement policy that does it all. The IRS calls this approach a fixed and variable rate allowance, known as FAVR.
The FAVR car allowance
An accountable plan, FAVR delivers tax-free payments. It also bases rates on localized cost data while optimizing payments to low-mileage, mid-mileage, and high-mileage drivers. Paired with an automated mileage app, a FAVR plan can save money and help employees be productive and efficient.
Setting a vehicle reimbursement operations budget can get complicated because of all the hidden costs extending beyond monthly car allowance payments or mileage reimbursements.
A FAVR plan takes out the guesswork because it is based on actual cost data derived for the most reasonable vehicle for each employee role.
In 2024, as inflation breaks budgets and places pressure on your employees, taking the time to explore the possibilities of FAVR could pay dividends in the future.
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