Reimbursing employees based solely on a per-mile rate gets expensive quickly when they clock a lot of miles on their personal vehicles. And it’s difficult to set a “fair” rate that’ll keep everyone happy as driving costs fluctuate week-to-week.
Enter: Fixed and Variable Rate car allowances, or FAVR for short
FAVR is an IRS-defined program that can help you save on mileage reimbursements and enhance employee satisfaction. FAVR mileage reimbursements are more precise and fair than Cent Per Mile reimbursements, preventing costs from growing out of control while accurately compensating your drivers.
Read on to explore the intricacies of FAVR and learn how implementing FAVR car allowances can benefit your business, field employees and admin staff.
[.toc-bg][.toc-heading]Contents[.toc-heading][.toc-div][.toc-div][.toc-flex][.toc-list][.toc-number]1.[.toc-number]What is FAVR?[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]2.[.toc-number]What are the benefits of a FAVR car allowance vs. other vehicle programs?[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]3.[.toc-number]Is FAVR right for your business?[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]4.[.toc-number]IRS FAVR guidelines in 2024[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]5.[.toc-number]How to calculate a FAVR allowance[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]6.[.toc-number]Best practices for implementing FAVR reimbursement[.toc-list][.toc-flex][.toc-bg]
FAVR is short for Fixed And Variable Rate. In Internal Revenue Bulletin: 2019-46, the IRS defines FAVR as:
“a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable rate payments that meet all the requirements of this section 6.”
Clear as mud, right? In non-government speak, FAVR mileage reimbursement provides employees both:
It’s like if a flat car allowance and a cent-per-mile program had a baby.
The idea behind it is that this model more accurately reflects true vehicle costs. The set amount reflects that there are costs just to own a vehicle, whether you drive it or not, like insurance. And the variable amount acknowledges there are additional costs that depend on how much you drive, like gas.
The way the amounts are calculated must follow specific requirements. Then the payments are considered non-taxable reimbursements for business use of personal vehicles.
Because of its accuracy, FAVR mileage reimbursement is widely considered the fairest reimbursement option. At the same time, FAVR car allowances can reduce overall expenses for companies with high-mileage drivers because they don’t over-reimburse employees beyond their actual costs.
The IRS has recognized FAVR as an accountable plan (non-taxable) for reimbursing car expenses since 1992. However, there is no equivalent in other countries. In Canada, the CRA considers the combination of a flat rate and per-kilometer allowance a taxable benefit.
CPM reimbursements and Accountable Plans are both relatively simple, IRS-approved ways to reimburse employees driving their personal vehicles for work. You could also maintain a fleet and have employees drive company vehicles instead.
So why would businesses consider providing FAVR mileage reimbursement, given how complex it is to calculate a FAVR allowance?
FAVR car allowances are a win-win for both the company and team members, helping drive employee retention without adding significant costs. It stands out among vehicle programs because it offers the whole package: fairness, cost accuracy, predictability, flexibility and risk management, along with tax efficiency.
Many companies prefer FAVR because it’s the fairest reimbursement option. FAVR car allowances most precisely represent employees' actual expenses by considering fixed and variable costs separately, tailoring rates to an employee’s location and adjusting for changing costs over time.
In contrast, the standard mileage rate lacks this precision. It relies on a national average of total costs when driving an average number of miles, and the IRS only updates it annually (or in exceptional cases, such as the 2022 mid-year adjustment.)
You could compensate for these deficiencies by customizing your own rates by state and updating them more frequently. But then you’d lose a lot of the simplicity of a CPM program.
Similarly, a flat allowance for all employees, or even by title, ignores the impact of mileage, location, and recent prices on costs, creating a mismatch between an employee’s actual expenses and what they’re paid.
Let’s go through a few scenarios illustrating why FAVR is consistently the fairest vehicle program.
Scenario 1: A slow month
Veronica, a sales manager in Atlanta, GA, usually drives 625 miles a month. However, in December, Veronica gets sick and also takes time off for the holidays, so only drives 341 miles.
Veronica’s FAVR car allowance is only about $72 less than her actual costs (because her vehicle’s lease payment is higher than the depreciation on her program’s standard auto, a 2024 Mazda CX-5 Select), but on a CPM program, her reimbursement is nearly $260 short! CPM's failure to recognize Veronica’s fixed lease payment and insurance cost makes it unfair during slow months.
Scenario 2: Rising gas prices
In January, gas prices in Atlanta surged from $2.99 to $3.86 per gallon, posing an additional challenge.
FAVR vehicle programs are agile, adjusting variable rates at least monthly. So Veronica’s reimbursement is only about $38 less than her actual costs because her variable rate increased from $.194 to $.225.
But on a static CPM program, her rate doesn’t change. Veronica’s reimbursement is almost $120 short, probably leaving her pretty unhappy.
Scenario 3: Employee in another state
Veronica’s colleague Alex, a sales manager in Los Angeles, CA visits the Atlanta office for training in January. They start talking about how gas prices have been going up and comparing notes. In California, they’ve jumped from $4.26 to $4.92 per gallon on average.
But Alex also gets the same $409.38 monthly reimbursement for driving 625 miles!
You can imagine his frustration at the way a CPM program unfairly treats all employees across the country the same–despite the reality that not only gas prices, but also maintenance, insurance and taxes vary by location.
As you can see, FAVR plans are the fairest, most realistic vehicle reimbursement model for every employee. As a result, it’s easy to show employees why it’s also the best plan for them and gain their support if you’re switching from another program type.
Because it closely matches an employee’s actual costs, FAVR car allowances also avoid over-reimbursing employees. They hav the potential to save your company money if you have high-mileage drivers or employees in lower-cost areas, compared to a CPM program.
Data on overall car costs shows the cost per mile goes down the more someone drives. For someone driving 15K miles per year, the average cost in 2023 was $.8121 per mile. But at 20K miles per year, the average cost dropped to $.6922 per mile because the fixed ownership cost is spread across more miles.
If you only reimburse at a cent per mile rate, your costs go up directly with every mile. The first mile and the 15,000th mile cost you just as much, even though the employee’s actual cost per mile has gone done. You end up over-reimbursing employees who drive a lot (and give them an incentive to rack up miles, sometimes unnecessarily).
A FAVR reimbursement plan gets around this problem by combining the per-mile rate with a fixed monthly allowance, reflecting the constant ownership costs.
For employees in lower-cost areas, the situation is the opposite of what those in California (like Alex) and other more expensive states experience. Paying them the same per-mile rate means they make money on every mile driven, inflating spend unnecessarily.
While FAVR plans help you stay agile and fair by adjusting reimbursements based on the most recent prices, they also offer stability.
The fixed rate doesn’t change throughout the year, providing predictability for both your and your employee’s budgets. This consistent amount serves as money they can count on every month to help with their car payment, even if they drive less.
The variable component, which is most affected by changing gas prices, makes up a smaller portion of the reimbursement. So even as it goes up and down, the fluctuations and their impact are noticeably less than with a CPM program.
Remember that slow December Veronica had?
Her reimbursement always goes down because she’s driving less, but with the standard mileage rate, the drops is over $190, compared to only about $65 with a FAVR mileage reimbursement. She’ll have to really rethink her budget if she’s in a CPM program.
The reverse happens when Veronica gets busier and drives more miles. She’s pretty happy she’s getting reimbursed more, but your company budget will feel the pain as expenses go up proportionally.
FAVR car allowances effectively minimize variability, facilitating forecasting, budgeting and better financial management for everyone.
FAVR programs come with strict IRS requirements to stay compliant and minimize taxable amounts. However, within those guidelines, there’s still flexibility to tailor FAVR rates to align with your financial goals, whether that’s a target budget or employee reimbursement amount.
In designing a FAVR plan, you have discretion (within limits) when deciding your:
Your selection for each will lead to a higher or lower average reimbursement, while still maintaining compliance. This ability to flex up and down is another key benefit of FAVR, particularly when you have clear financial objectives.
As part of a FAVR program, employees must provide proof that their auto insurance meets the minimum requirements you set out. This documentation is needed to justify the reimbursement, and also helps ensure employees are carrying adequate insurance to protect you in case of an accident.
One benefit of having employees drive their personal vehicles instead of company cars is the reduction of risk. If an accident occurs while an employee is working, their insurance will be primary. Only if there are excess damages will your company be liable.
However, if you don’t verify employees always have the appropriate insurance, you lose that benefit and may still be liable for all damages. You can also require insurance verification as part of a CPM program (and it’s a good idea to do so), but since it’s harder to show you’re helping to pay for the cost of that insurance, it may be a harder sell to employees.
As an IRS-compliant vehicle program, FAVR car allowances offer many tax benefits. The reimbursement can be entirely tax-free for both the employee and your company as long as certain conditions are met. Even if an employee does not meet all of them, their reimbursement would only be taxed beyond what their reimbursement would have been based on the standard mileage rate.
A CPM program also provides the same tax advantages, but a flat allowance may not. Unless you require mileage logs to justify the allowance, turning it into an Accountable Plan, the amount is treated as regular pay and taxed the same way. As a result, about 30% of your spend never even makes it into employee's pockets.
For an in-depth discussion of the cost of allowances to your business, please see our guide on The True Cost Difference: Vehicle Stipend vs. Mileage Reimbursement.
FAVR reimbursement comes with unique benefits: fairness, cost accuracy predictability and flexibility, along with risk management and tax efficiency.
But it has one major downside: it’s more complex than other vehicle programs. That translates to more admin work if you manage it internally, or a higher cost if you’re using a FAVR provider (see Everlance’s pricing here).
So is the tradeoff worth it? That depends primarily on the characteristics of your business and your priorities.
The IRS requires that you have at least five employees driving >5,000 business miles/year to qualify for FAVR, but beyond that, we see the companies that benefit most have:
When you have employee groups with different needs, it often makes sense to provide them all FAVR car allowances, but design different FAVR programs for each group–like one for sales managers and one for sales reps.
[.blue-line][.866]If employee groups are very different though, it might be more practical to have some on a FAVR program, and others on a different type of vehicle program. Programs are not one-size-fits-all.[.blue-line][.866]
For example, some of our customers put their entire sales team on FAVR, but keep an allowance for executives and pay a standard mileage rate to seasonal employees.
You’ll notice that company industry was not on the list of factors to consider. We’ve seen FAVR reimbursement work well across sectors, including:
Ultimately, if fair reimbursement and taking care of employees through changing circumstances are priorities, a FAVR plan often proves suitable for any type of business.
Beyond your company characteristics, market trends can also put FAVR top-of-mind and make it the right fit for your business, right now. Recent ones are:
In the past couple of years, the national average retail price of gas has fluctuated between a high of $5.02 per gallon and a low of $3.03 per gallon. When prices vary so much, a CPM program’s inability to keep up and FAVR’s fairness become more apparent. Employee complaints during the height of prices in 2022 prompted many businesses to evaluate the benefits of FAVR car allowances.
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A related concern is the percentage of Americans now living paycheck-to-paycheck: 62% as of November 2023. When money is so tight, your reimbursement’s ability to fully cover an employee’s actual expenses has a major impact on their financial well-being.
As we saw earlier, unless an employee lives in an area with average costs and drives an average number of miles, FAVR does a much better job than a CPM program at consistently matching the employee’s costs. Plus, FAVR’s predictability helps alleviate at least some of the financial stress.
On the regulation side, the Tax Cuts and Jobs Act also makes it more important to fully cover an employee’s vehicle costs. Effective January 2018, it eliminated most taxpayers’s ability to claim unreimbursed employee expenses as a deduction. Before, employees could at least claim any difference as a deduction and reduce their taxes. Now that option is gone.
Moreover, as more and more companies adopt FAVR car allowances, it’s increasingly likely a potential hire will have experience with FAVR at a prior employer. They’ll want to know that your vehicle program offers them the same fairness and predictability.
Still unsure if FAVR mileage reimbursement is the right fit for you? We can help you conduct a no-risk assessment and recommend the best programs for your circumstances.
The IRS’ guidance on FAVR is detailed in Section 6 of Rev. Proc. 2019-46. At nine pages long, it’s not an unreasonable read if you’ve got time to spare.
But seriously, who does? So we’ve paraphrased the key points for you here.
At a high level, for a company to offer FAVR car allowances:
Furthermore, only certain employees can receive a FAVR car allowance.
The vehicle the employee drives for work must meet certain requirements, too. Two of the three conditions that must be met for a FAVR car allowance to be completely tax-free pertain to this, known as the the vehicle value and age tests (the third one is the 5,000 annual business mileage minimum.)
Even if a driver does not meet one or all of the conditions, their reimbursement would only be taxed on the amount that exceeded the per-mile equivalent of the Standard Mileage Deduction Rate, minimizing the tax waste.
The vehicle must also be:
Then the employee and employer have certain reporting requirements to prove compliance with these rules.
Employees need to provide their information within 30 days of the plan’s start, and the first three items again at the beginning of each year.
In terms of how to calculate a FAVR allowance, there are just a few main points. It must be based on data that:
And unsurprisingly, the company or its agent needs to maintain written records of the data and calculations used to determine the reimbursement.
In addition to the FAVR-specific rules, employees must follow the IRS mileage log requirements for documenting their business mileage. Logs should include:
There is no rule about format; logs can be pen-and-paper, on a mileage log spreadsheet, or downloaded from a mileage tracker app. However, apps are ideal for ensuring IRS compliance because most automatically document the miles, date and destination of a trip. Then an employee simply has to add the trip purposes.
Everlance also provides an admin dashboard linked to our app, so managers can immediately view work trip details, and approving mileage logs for reimbursement is easy.
Time to get down to the nitty-gritty! The IRS FAVR guidelines lay out the type of data that must be used to calculate a FAVR allowance, but leave the process up to you.
The main steps are:
Prefer to skip all the details? Everlance can design and administer a FAVR mileage reimbursement program for you. Get in touch today.
To personalize reimbursements to each employee, you need to gather some personal information about them. Namely,
The zip code part is typically pretty easy. Someone on your HR team should be able to pull this data and give you a spreadsheet with the zip code of each participating employee.
Their annual mileage may be a little trickier depending on what program(s) you’re using today. However, you don’t need an exact amount – just a “mileage band,” representing a 5,000-mile range (e.g., 5,000–10,000 miles or 10,000–15,000 miles). And if after your program starts you see someone’s actual miles are trending a lot higher or lower than their mileage band, you can make a mid-year adjustment.
For employees on a cents-per-mile program, just add up their total mileage reimbursement for last year and divide it by their per-mile rate to get their annual mileage (see past IRS standard mileage rate here, if that’s what you use). Then set each employee's mileage band based on what they did last year, adjusting for any major changes you’re expecting this year.
For employees on a flat car stipend or company vehicle, ask them to record their mileage for one month before starting the program. They can just use pen-and-paper, a mileage log spreadsheet, or a mileage tracker app, but we recommend an app because it will be easiest for the employees and is the most accurate. Then extrapolate their mileage for the entire year based on that data.
The foundation of employee personalization is the data collected in the previous step, which you’ll notice does not include what type of vehicle they drive. Not only would that make calculating FAVR car allowances many times more complex, but it would also be unfair.
A person driving a low MPG truck would get “rewarded” with a higher reimbursement because their costs are higher, while a person driving an environmentally-friendly electric vehicle would get “penalized” with a lower reimbursement, even though they’re both expected to do the same job.
[.blue-line][.866]The IRS gets around this complication by basing allowances on what’s called a representative “Standard Auto” that employees are expected to drive, also known as the program base vehicle.[.blue-line][.866]
But that doesn’t mean employees have to drive the standard auto. They have the flexibility to choose any vehicle they want, as long as:
This way, all employees enjoy freedom of choice around the vehicle they drive, but all are held to the same standard for reimbursement. And the value and age requirements help ensure employees show up to customers in a vehicle aligned with the brand image you want to project.
It’s worth noting you don’t have to select the same standard auto for all employees. Many companies will create two FAVR programs with two different standard autos – a higher-class vehicle for Managers and a mid-range vehicle for others.
In general, the higher the class of vehicle, the richer the reimbursement will be. So your goals for company spend and employee benefit will be key when choosing your standard autos. If you have a target budget you need to stay below, or a target amount you want to reimburse employees each month, FAVR usually has the flexibility to accommodate it.
With steps 1 and 2 complete, you can now set each employee’s personalized fixed allowance. You just need to determine the fixed costs for the standard auto in the employee’s zip code, given their annual mileage band.
Fixed costs are those that remain relatively stable whether you drive a lot or a little. They’re costs you have to pay just to own a vehicle, even if it sits in your garage.
Common fixed costs include depreciation, auto insurance, personal property taxes and license and registration fees.
Online resources, like Edmunds and Kelley Blue Book, provide the cost to own specific vehicles, and work well for costs like depreciation and fees that do not change much from area to area.
Auto insurance is not quite as easy since where an employee lives can really impact insurance rates. You could use an online tool to generate insurance quotes for each employee’s zip code, with the standard auto and the level of coverage you require, but that would get tedious and time-consuming pretty quickly.
That’s where FAVR solution providers like Everlance can help. With direct access to an insurance rate database, we can efficiently pull costs for your standard auto and coverage requirements in every employee's zip code.
However, an employee’s individual driving history cannot be factored into cost calculations. As with the standard auto, we don’t want to inadvertently reward high-risk drivers who have to pay high insurance premiums with a bigger reimbursement, and penalize low-risk drivers.
Once you have all the fixed costs, total them for the year. Then divide to determine the amount for each pay period – by 12 if monthly, 24 if semi-monthly and 26 if bi-weekly.
The final step before you can launch a FAVR program is determining each employee’s personalized variable rate–the amount they receive for every mile driven for work. Like with the fixed rate, it involves adding up all the variable costs for the standard auto in the employee’s zip code, given their mileage band.
Variable costs are costs that do change significantly depending on how much you drive. They’re expenses you have to incur to make a vehicle go and keep it in safe working condition.
Common variable costs are fuel, tires, oil changes and other routine maintenance and car washes.
As we all know, gas prices can vary quite a bit from town to town, or even block to block. You can use an online resource, like GasBuddy, to look these up for every employee’s zip code, but like with auto insurance, it’d be a pretty big time suck.
And again, that’s where a provider can help. At Everlance, we have access to an up-to-date database of average gas prices by zip code. Then using the MPG of the standard auto, we can determine the per-mile fuel cost.
Similarly, the per-mile cost of tires and oil changes can be determined based on the manufacturer’s recommended maintenance schedules.
You have a bit more leeway with car washes. Most companies set their own requirements for how often employees should get one, taking into account driving conditions like whether employees are mostly on dirt roads or city streets.
Once you have all the per-mile costs, just total them up to calculate an employee’s variable rate.
At this point, the good news is you have all your inputs to calculate your first FAVR car allowances, using this formula.
The slightly less good news is that you’ll have to regularly update that variable rate for IRS compliance.
How you set the variable rate doesn’t change, but the cost data you use to calculate it should update. FAVR mileage reimbursement is supposed to pay for gas, so when fuel prices go up, so should the variable rate, and when gas prices go down, the variable rate should too.
These adjustments help ensure employees are always fairly compensated for what they’re spending at the pump, without trapping the company into high reimbursements when prices go down.
Most FAVR programs update the variable rate monthly. Best-in-class programs, like Everlance, update it weekly for optimal accuracy and fairness.
To illustrate how to calculate a FAVR car allowance, let’s use the example of 2 representative employees:
Based on your target reimbursement ranges, you’ve decided to create 2 FAVR programs:
Starting with Frank here are the costs for his program’s standard auto in Pensacola, FL.
Frank’s monthly fixed rate is $3,257 divided by 12, or $271.42. His initial variable rate will be $.165 per mile. If he drives 1,250 miles his first month, his total combined reimbursement will be $271.42 + ($.165 * 1,250) = $477.67.
For Veronica, here are what costs for her program’s standard auto look like in Atlanta, GA.
Thus, Veronica’s monthly fixed rate is $4,315 divided by 12, or $359.58. Her initial variable rate will be $.194 per mile. If she drives 625 miles her first month, her total combined reimbursement will be $359.58 + ($.194 * 625) = $480.83 in this FAVR car allowance example.
So you’ve weighed the pros of fairness, accuracy, stability and flexibility against the con of added complexity, and decided a FAVR car allowance is the right fit for your business. Congratulations, you’re about to embark on an exciting transition!
Now let’s discuss best practices for a smooth implementation.
One of the beauties of FAVR is its flexibility, which makes it easier to achieve your goals. That said, it’s helpful to lay out what those goals are at the start! Get together with program stakeholders and align on your:
The next important decision is whether you’ll administer FAVR car allowances in-house or partner with a provider.
Administrative capacity should be your main consideration. The time it takes to calculate FAVR car allowances, keep up with the latest prices and update rates, check employee compliance and provide support to employees is substantial, both up-front and on an ongoing basis.
So while it’s possible to run an IRS-compliant program independently, many companies choose to turn to a solution provider. They find the added cost is well worth the time and effort saved, so they can focus on their core business (not reimbursements).
You also benefit from a provider’s experience implementing FAVR programs for other customers. Instead of you collecting cost data and building FAVR models from scratch, you simply have to provide your employee data and they’ll design rates based on your goals. Implementation can be completed sooner, which may be important if you have a tight timeline.
At Everlance, our average implementation time for a FAVR program is 6-10 weeks. That may be longer if you’re coming from company cars and your employees don’t all have vehicles already, or shorter if you’re coming from an existing FAVR reimbursement plan.
When selecting a FAVR provider, some areas to keep in mind and evaluate are:
Effective employee communication and training are crucial, especially if you’re transitioning from a different vehicle program to FAVR car allowances.
[.blue-line][.866]Change is always hard at first, but helping employees understand why FAVR is a fairer program for them will go a long way in getting them on board.[.blue-line][.866]
You should explain how FAVR rates are calculated, the specific requirements for your program and how employees will record and submit their mileage for reimbursement. Depending on the norms at your organization, you may choose to hold training sessions, share pre-recorded videos, send emails or memos, or a combo of these methods to provide the info.
Training is another area where a provider’s experience can come in handy. They may have communication templates that you can use, and since they’ve heard most of it before, be prepared with answers to frequent questions and objections. We even run a “test drive” with employees before their program goes live to ensure they understand how it works and feel confident about the system on Day 1.
Even while you’re still implementing a FAVR program, you should plan how you’ll manage it going forward.
Most employee questions will come up during onboarding, but new ones may crop up as they start using the program, too. And there’s the question of new hires and how they’ll be onboarded to FAVR. Lay out who the go-to person should for different types of questions, whether it be an employee’s manager, the program manager, HR or someone else.
Then there’s the logistics of keeping FAVR rates updated. If you’re administering the program yourself, how will you stay up-to-date on fuel prices, update variable rates and communicate them to employees? If you’re working with a partner, how do they provide these updates to you and your employees?
Thinking through these aspects not only enables smoother ongoing management, but may also help address questions that arise during employee training.
If you’ve made it this far through the guide, we hope you found it useful. Still have questions? Please fill out the form below and we’ll connect you with one of our FAVR experts.
Everlance is top-rated for our ease of use, and we’re here to make FAVR easy for you!
Cindy leads the B2B marketing team at Everlance, spreading the word about how our easy-to-use software makes life easier for vehicle program managers and mobile employees. She loves sharing customer stories and helping businesses find ways they can save time and money too.
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