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There’s a variety of factors that could make one vehicle program more cost-effective and efficient than another:
We could go on! And with the number of vehicle programs available, finding the right plan for your company can feel like searching for a needle in a haystack.
However, the benefits of finding the right vehicle plan for your company are significant, especially during these challenging times. Choosing a plan that’s a great fit for your company can:
In this guide, we’ll focus on two popular vehicle programs: the vehicle stipend, or car allowance, and mileage-based reimbursements. Read on to get the true cost breakdown of each of these, as well as the effects that each program can have on your employee satisfaction.
[.toc-bg][.toc-heading]Table of Contents[.toc-heading][.toc-div][.toc-div][.toc-flex][.toc-list][.toc-number]1.[.toc-number]Vehicle stipend & reimbursement 101[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]2.[.toc-number]The true cost of a flat allowance program[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]3.[.toc-number]The true cost of mileage reimbursement programs[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]4.[.toc-number]The right software business tools[.toc-list][.toc-flex][.toc-bg]
First, let’s go over the basics of your options for compensating employees when they drive their own vehicle for business purposes.
A stipend, or flat allowance program, reimburses your employees a set amount for the gas, maintenance, insurance and any other costs related to driving their personal vehicles on company business.
A mileage reimbursement program pays your employees an amount that can change based on how many miles they actually drive for work. There are two main types.
1. Fixed & Variable Rate (FAVR). A FAVR program reimburses drivers for both the fixed costs of owning a vehicle, such as insurance, taxes, and depreciation, and the variable costs of operating a vehicle, like fuel and maintenance—all of which can differ based on vehicle type and location. It uses a set fixed reimbursement as well as a smaller variable reimbursement calculated based on variable costs.
2. Cents Per Mile (CPM). A CPM program reimburses employees at either the IRS standard deduction rate or an internally developed custom rate for every mile they drive.
Going with a flat-rate car allowance program may seem attractive for a couple of reasons.
However, these “attractive” reasons start to break down when you look beyond face value. For example, take the implementation and cost of such programs—it seems straightforward, right? After all, all you have to do is set aside, say, $600 a month per employee, and then give them their stipends.
Not exactly.
[.866][.blue-line]Flat allowances have a major downside: the IRS considers them as income and as a result, they create “tax waste.”[.blue-line][.866]
Since a monthly allowance is considered a form of compensation similar to a salary, it falls subject to payroll and income tax. This waste means your employees end up taking home much less money than what their actual allowance is.
For example, for a driver receiving $600 per month, as much as 40% can be lost to taxes. So if you want to make an allowance program work for your company, we suggest adding a 30% cushion to account for both the taxes you and your employees will have to pay.
Another factor to consider when evaluating vehicle programs is their fairness. Are vehicle stipends fair?
The truth is that flat allowance programs are easy to take advantage of and not as fair as a mileage reimbursement program.
A flat allowance program is one size fits all: the company gives every employee in the same role the same allowance no matter where they are located, the type of vehicle they drive or how many miles they drive.
Therefore, some employees may feel motivated to drive less so they can pocket the extra money from their stipends. On the flip side, a flat allowance can be unfair to the employees who don’t exploit their stipends and put in a lot of miles doing their jobs. Their actual costs for using their personal vehicle might actually add up to more than the allowance.
As a result, these hard-working employees may become dissatisfied that they are not getting fully compensated for how much they're driving, especially if they talk to others and learn that someone else is getting the same amount of money for doing less work. The negative feelings can fester, eventually driving employees to leave and seek other opportunities—a potential unintended but costly consequence of a flat allowance program.
As mentioned, dissatisfied employees—which is likely to happen with “one-size-fits-all” programs like vehicle stipends—leads to higher employee turnover.
Employee turnover naturally leads to added hiring and recruitment costs—not to mention the costs of training and getting a new employee up to speed.
[.split-text-wrap][.text-wrap][.text-wrap-paragraph]Since employees have so many great opportunities to choose from in the current market, hiring costs have begun to rise. Benchmarking data from the Society for Human Resource Management (SHRM) put the average cost per hire in 2022 at $4,683. SHRM Foundation chair-elect Edie Goldberg estimates the total cost is three to four times the position's salary when also taking into account soft costs, like the time department leaders invest. These challenges can not only lead to extra strain on your Human Resources team and others that have to make up for the work, but also hurt team morale.[.text-wrap-paragraph][.text-wrap][.mixed-font-a][.is-green-bold]$4,683[.is-green-bold][.is-info]the average cost per hire in 2022[.is-info][.mixed-font-a][.split-text-wrap]As you can see, a flat allowance may seem easy to implement, but there are major cost disadvantages that become apparent upon closer evaluation.
The best alternative to an allowance program is a mileage reimbursement program.
There are two main types—a fixed and variable rate (FAVR) program or a cents per mile (CPM) program—and each one has their own advantages and disadvantages.
Overall, however, either mileage reimbursement program will be fairer than a flat allowance or stipend program because the distance an employee drives is taken into account in calculating their reimbursement.
It’s more likely that their compensation will be aligned to their driving costs, and because they require employees to submit mileage logs to justify their reimbursement, they’re less likely to be taken advantage of. Therefore, you reduce the possibility of employee dissatisfaction with your vehicle program on two fronts.
If you work at a larger organization and your drivers’ business mileage and geographic locations differ greatly, a FAVR program might be right for you. In order to meet IRS requirements that make a FAVR program tax-advantaged, your business must have, at a minimum, five drivers who each drive at least 5,000 business miles every year.
However, if your company has relatively low to moderate mileage drivers, a cents per mile program is likely the best route. CPM is typically a fair and easy program to implement and can also be a great option for companies who want to move from a flat allowance program to one that is more tax efficient.
A FAVR program works by reimbursing drivers at a fixed rate and a variable rate:
This personalization means a FAVR program is generally the fairest vehicle reimbursement program.
In addition to the actual number of miles driven, a FAVR program takes into account current costs where an employee is located and for the type of car they’re expected to drive to determine their mileage reimbursement.
Therefore, each employee’s reimbursement should closely match their actual costs, and they can see that they are getting appropriately compensated based on their unique circumstances. Implementing FAVR is one way companies can show they are truly taking care of their employees, which hopefully helps improve employee satisfaction and reduce turnover.
All of these factors do make a FAVR program more difficult to implement and manage, so your program administration costs may be higher.
You’ll have to weigh the cost against the benefits of a fair program that’s tailored to employees and keeps up with changing driving costs and amounts, as well as the savings from preventing over-reimbursement of high mileage drivers (more on that below).
A CPM (or cents per mile) program is a basic mileage reimbursement program that reimburses employees based on a flat rate per mile driven.
Your business would decide whether to reimburse your workers at either a custom rate or the IRS business mileage standard, which is based on a national average of driving costs. For the latter half of 2022, the IRS standard mileage rate is $0.625 per mile.
And in order to meet IRS criteria for tax-free reimbursement, you must get a mileage log from every driver with the following:
With a CPM program, you do run the risk of over-reimbursing high-mileage drivers and adding to your costs unnecessarily. How? Let’s look at an example:
Let’s say you’re reimbursing employees at the current IRS standard rate. In this case, you are likely paying your employees more than their actual costs if they are driving 20k miles or more per year. That’s because the average cost per mile goes down the more an employee drives— their fixed costs of vehicle ownership get spread out over more miles, while the actual lower variable cost per mile (mostly fuel) stays about the same.
To fix this problem, you could reimburse at your own custom per mile rate that’s lower than the IRS guidance, but that poses a potential issue if your company has both low and high mileage drivers. Your low mileage drivers may be disgruntled by the fact they’re not getting a rate that fully covers their costs of owning and operating their vehicle for work.
CPM is a one-size-fits-all plan, which can seem fair on the surface, but actually is not as fair as FAVR because it doesn’t recognize differences among drivers that should have an impact on their reimbursement.
These pitfalls are why a FAVR program tends to be the most cost-efficient and fair option for companies to reimburse their high mileage employees. Some then choose to put all employees on a FAVR program for consistency, while others keep low mileage employees on CPM for easier management while still being tax-efficient. Don’t forget using multiple programs is an option!
Now that we’ve gone over the true cost difference between stipend and mileage reimbursement program, you can choose which vehicle program(s) is the most efficient one for your company. Although a flat allowance program is the easiest one to implement, the two mileage reimbursement programs we’ve reviewed—a FAVR or a CPM program—are generally more fair and have greater tax efficiency.
With these reimbursement programs, you’ll want to ensure accurate tracking of your employee driving miles. Even if a 9-mile trip gets reported as 10 miles, those overestimated miles add up over time. If you’re not verifying employee mileage, your business could still be over-reimbursing employees.
While your employees could log their miles with pen and paper or by hanging onto all of their gas receipts, manual tracking methods are time consuming and prone to human error. Another option is to use a mileage tracker. Mileage trackers can come as apps that you simply download, but reliability and accuracy are common challenges. Plus, most of them are missing crucial reporting and data analytics features.
Everlance is an all-in-one solution for vehicle and expense reimbursement. Our platform not only offers an app for tracking mileage that's accurate and easy-to-use, but also centralizes all employee trips and expenses on an easy-to-use administrator dashboard, streamlining the reimbursement process and unlocking valuable business intelligence for your team.
We help people save time and money. At Everlance, we're on a mission to empower mobile workers and businesses. That sometimes leads us to generalize tax information. Everlance team members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.
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