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Fixed & Variable Rate (FAVR) Reimbursement Plans

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The Fixed and Variable Rate (FAVR) plan is another method businesses can use for reimbursing employees who drive their own vehicles for work purposes. While the majority of companies use the IRS standard mileage rate, FAVR could be a more precise alternative and better option for your company.

Let’s review what FAVR is exactly, so you can decide for yourself which reimbursement plan makes the most sense for your company or department.

What is a FAVR Reimbursement Plan?

A FAVR plan reimburses employees who use their own car for business purposes, based on a combination of mileage reimbursement and a monthly allowance. This includes both fixed and variable vehicle expenses, which are made in periodic payments to employees.

The fixed payments cover the fixed costs for depreciation, insurance, registration fees, and taxes. The total costs for these expenses are calculated and then adjusted to reflect the percentage of time the vehicle is used strictly for business.

The periodic variable payments cover variable costs, including fuel, oil changes, tires, and routine maintenance. When using a FAVR plan, your employees are typically reimbursed on a non-taxable basis.

FAVR Reimbursement vs. IRS Standard Mileage Rate

FAVR allows businesses to offer a more accurate reimbursement plan when it has mobile employees who are spread out in different states. By customizing a specific rate to different regions, it takes into account the higher or lower fuel costs and other car expenses. For instance, operating a vehicle in New York or California costs more than doing so in the Midwest. By addressing these price differences, it avoids over- or underpayments when reimbursing employees.

Businesses who use the Standard Mileage Rate to reimburse their employees, which is 58 cents per mile for the 2019 tax year, is more straightforward, but it doesn’t address the fact that vehicle expenses vary by region,  especially fuel costs, which are rapidly changing. In this case, employees could be spending more on business travel than they’re being reimbursed for. Or, they could be reimbursed too much, if gas prices have fallen.

Is FAVR Right for Your Business?

FAVR does have some requirements. Specifically, it’s for any company that has mobile workers driving more than 5,000 miles for business on a yearly basis.

Some examples of businesses who may benefit from using FAVR include sales executives or consultants who need to drive regularly to meet with clients, home healthcare workers who make patient visits, or restaurants and food service companies that offer delivery services, amongst many other types of businesses.

The IRS guidelines for FAVR can be found here. Whether your company utilizes FAVR or the standard mileage reimbursement rate, it’s smart to have your employees accurately and automatically record all of their business mileage and vehicle expenses.

How can I implement a FAVR program for my company?

Everlance Teams allows your staff can track their mileage and make distinctions between business and personal trips, rather than trying to keep paper logs. Everlance Teams also gives your the flexibility to choose a cent per mile reimbursement rate. This saves your business valuable time and money, while also being able to accurately report these expenses to the IRS when tax time rolls around.

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