From employee benefits and vehicle needs to compliance and tax implications, there's more than one factor that could make a vehicle reimbursement program the more cost-effective and efficient choice for your company. During these challenging times, finding competitive edges like the right plan for your company can not only improve your bottom line, but also help you navigate the ‘Great Resignation.’

In this guide, we’ll focus on the true cost difference between a stipend program and mileage-based reimbursements, as well as the effects that each program can have on your employee satisfaction.

Stipend & reimbursement 101

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 programs pays your employees an amount that can change based on how many miles they actually drive for work. There are two main types:

  • Fixed and variable rate (FAVR). A FAVR program reimburses drivers separately for the fixed costs of owning a vehicle, such as insurance, taxes, and depreciation, in addition to variable costs of operating a vehicle, like fuel and maintenance—all of which can differ based on vehicle type and location.
  • 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.

The true cost of a flat allowance program

Going with a flat allowance program may seem attractive for a couple of reasons. First, giving your employees a monthly stipend for using and driving a personal vehicle seems like a nice perk.

Flat allowance for a driver receiving 600 per month: $180 employee taxes, $60 employer taxes, $420 employee take home benefit
Representative example based on a single-status tax filer making $85K/year in California pre-tax and not including additional local taxes that may apply

Second, the idea of implementing a flat allowance program seems easy enough. All you have to do is set aside, say, $600 a month per employee, and then give them their stipends, right? Not exactly. In reality, you end up paying more and employees end up receiving less in their bank account.

Flat allowances have a major downside: the IRS considers them as income and as a result, they create “tax waste.” 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 flat allowance programs is that they 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.

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, perhaps because they have a work route that requires fewer miles. 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.

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. Add the fact that we’re in the midst of the 'Great Resignation,' and companies will need to overcome the challenges of hiring in a tight labor market.

Since employees have so many great opportunities to choose from, hiring costs have begun to rise. New research from Zippia estimates that the average cost per hire in 2022 will be $4,425 and that it will take 36 to 42 days to fill an average position in the United States. 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 your customer service levels. 

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 true cost of mileage reimbursement programs

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, both mileage reimbursement programs are fairer than flat allowance or stipend programs because how much 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.

FAVR for a worker driving ~1K miles a month: 100% tax free monthly variable payment + monthly fixed payment

The program works by reimbursing drivers at a fixed rate and a variable rate. The fixed rate considers the fixed costs of owning a vehicle (i.e., insurance, registration and taxes). The variable considers the variable costs of operating the vehicle (i.e., fuel, tires and maintenance). Depending on where your employees are located and the vehicle-related costs in their local area, the fixed and variable rates can vary across your employees.

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).

Learn how Everlance simplifies FAVR reimbursements

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.

For a worker driving ~1K miles a month: $585 employee reimbursement (non-taxed)
Representative example based on the 2022 standard mileage rate of $.585/mile

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 2022, the IRS standard mileage rate is $0.585 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:

  • Trip date & purpose
  • To/from destination
  • Mileage recording

With a CPM program, you do run the risk of over-reimbursing high-mileage drivers and adding to your costs unnecessarily. For example, if you’re reimbursing employees at the current IRS standard rate, 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. 

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.

Download the Report: Matching Up Vehicle Costs and Employee Benefits

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!

The right software business tools

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.

Vehicle reimbursement program comparison

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. Without verifying their miles, 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 accurate mileage tracking, 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.

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