Businesses that rely on mobile workforces have choices when it comes to paying for or reimbursing employees for work-related driving costs. Traditionally, companies have turned to one of three models: cents-per-mile reimbursements, standard car allowances, and fleet vehicles.
In the first two installments of this three-part series on creating an effective, equitable vehicle program, we took a look at the challenges companies typically face as they consider options for high-mileage drivers. Then we laid out the risks and potential exposures inherent in each of the traditional approaches. Here, we’re exploring what an increasing number of companies are recognizing as a better alternative: fixed and variable rate (FAVR) reimbursement.
The FAVR model is commonly built on six components – three fixed and three variable – all of which are incorporated into reimbursement calculations customized for each employee driver. Fixed costs include license and registration fees; taxes and depreciation; and insurance premiums. Variable costs include maintenance; fuel and oil; and tire wear. FAVR is designed for workers who drive their personal vehicles for job-related purposes at least 5,000 miles each year.
Compared to the three traditional models, FAVR is:
- More equitable than cents-per-mile reimbursements because it avoids over- and under-payments, which can diminish employee satisfaction. Because FAVR reimbursements are based on actual rather than estimated out-of-pocket vehicle usage costs, employers do not overpay and employees get their fair share. There are no tax liabilities for either party, since FAVR reimbursements comply with IRS standards and do not qualify as additional income.
- Less of a tax burden than car allowances because it eliminates the possibility of employers and employees overpaying FICA taxes for imprecise allowance payments. Calculating reimbursement rates per the FAVR model is the only IRS-recommended methodology.
- More cost-effective and less risky than fleets because it saves companies the significant financial and administrative burden of managing fleet vehicles while lowering round-the-clock liability. FAVR also lends to employee satisfaction, as it allows people who drive for work to drive their own preferred vehicles.
Naturally, automation is key. That’s why we’re so excited to partner with Motus to offer SAP Concur FAVR by Motus as part of our suite of solutions. It captures, maps, and reports on actual work-related vehicle usage in real time. It’s also scalable and cloud-based, adjusting for fluctuations based on location, vehicle type, and other factors. Best of all, it integrates fully with the Concur Expense application, which allows companies to fold it seamlessly into existing administrative and reimbursement systems.