If you’re reading this guide, your employees probably drive as part of their jobs—whether that’s meeting with clients, visiting job sites, making deliveries or performing other duties. But which vehicle program is right for your organization and your employees?
With the various types of vehicle programs out there, deciding which one to go with can be tricky. Every program has its own benefits and drawbacks with important potential consequences, like compliance stipulations, tax waste, liability and mileage inflation. The vehicle program you choose should be economical, fair to employees, easy to implement, flexible yet predictable, and, of course, suit your business needs.
That’s why we’ve put together this comprehensive resource on vehicle programs. Keep reading to learn more about the different types, how you can determine which one is right for you and how to implement it.
Simply put, different vehicle programs are designed to meet the needs of different organizations. Do you have 50 mobile employees or 5,000? How many miles a month is the average employee expected to drive? Here are the different kinds of programs out there:
The first program type is just as it sounds—no program. Employees drive their own vehicles for work purposes without any reimbursement or compensation.
With this program, you provide the vehicles for employees to use. However both the employer and employees will need to document any personal use of the vehicle, which is considered a fringe benefit and needs to be taxed as personal income.
FAVR programs reimburse drivers 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.
This program reimburses employees at either the IRS standard deduction rate or an internally developed custom rate.
Also known as a car stipend, this program gives employees a set amount every month to help cover the costs of driving their personal vehicles for work.
The right vehicle program for your team is simple, efficient and achieves your goals—whether that’s fairly reimbursing employees, reducing costs or saving time.
But first, let’s cross off the option of not having a vehicle program. No matter how much you might think you can swing it, not having a program opens you up to a substantial amount of risk. You can be subject to civil lawsuits from employees that go unreimbursed or feel that they have not been reimbursed fairly—not to mention IRS audits.
So where does that leave the other vehicle program options?
If vehicles need to have specific capabilities or functions, you can consider taking the route of providing vehicles to your employees. These typically include trucks, SUVs, trailers, buses, motorbikes and loaders to meet specialized work requirements.
Beyond that, some teams decide to go with fleet vehicles to ensure their brand is represented the way they want. For example, you may want all your employees to drive a certain class of car so that it aligns with your brand image, and feel concerned that you won’t achieve that with employees driving their personal cars. A FAVR program can actually help you address this challenge, which we will go into more detail in the next section below.
Despite their benefits, owning fleet vehicles can introduce a slew of unforeseen issues. First, fleets can be one of the most costly programs since you must purchase and maintain your vehicles on your own. There could even be additional expenses for storing or parking an owned vehicle when it's not in use. With a fleet, you’re essentially paying for the costs 24 hours a day, 7 days a week when in reality, the vehicles are maybe only used for work 8 hours a day, 5 days a week.
Owning fleet vehicles also poses an obvious challenge to cash flow—buying new cars, even if it’s just every few years, is a huge capital outlay. In contrast, reimbursement programs for driving personal vehicles only require smaller and more regular payments. Even if the total cost between programs is comparable, smaller payments over time are more gentle on your cash flow.
Furthermore, fleet vehicles can open your organization up to more risk and liability if an employee gets into an accident. Not only must you secure solid insurance—and pay for it—but owning fleet vehicles is also simply another risk. Conversely, if you choose a program in which your employees drive their own vehicles, they must have personal auto insurance. Their insurance can serve as an effective “first line of defense,” lowering your organization’s risk and the level of insurance you need to carry.
For these reasons, more and more companies are disposing of their fleet and switching to reimbursement programs.
At organizations where drivers’ work mileage and geographic locations vary, a Fixed and Variable Rate (FAVR) program is typically best—and fairest. It’s tax free if you meet the IRS requirements, which are, at a minimum, five drivers who each drive at least 5,000 work miles every year.
With a FAVR program, you reimburse drivers with a fixed rate and a variable rate. The fixed rate takes into consideration the fixed costs of owning a vehicle (i.e., insurance, registration and license fees, taxes and depreciation). Employees receive a fixed monthly reimbursement for these costs, which helps provide predictability for them and finance.
The variable rate takes into consideration the variable costs of operating the vehicle (i.e., fuel, oil, tires, and maintenance). It is updated monthly to keep up with fluctuating fuel costs, and multiplied by the number of miles an employee drives to determine their variable reimbursement.
The fixed and variable rates will vary across your employees depending on their geographic location and local costs, so employees are reimbursed fairly no matter where they’re located and you, the employer, don’t overpay. For example, if some employees are located in New York, where costs are high, and others are in Maine, where costs are lower, reimbursing all employees the same would be troublesome. You’d either be over-paying the employees in low cost areas, or have upset employees in high cost areas who aren’t getting fully compensated for their actual costs to own and operate their vehicle.
And if it’s important to properly represent your brand through the car that an employee shows up in, FAVR helps account for that too. You set reimbursements based on a certain “standard” car that you expect employees to drive, and the standard can vary for different levels of employees (such as managers vs. reps). This flexibility also gives you the best spend control out of all the vehicle reimbursement options. Within the IRS guidelines, you can design your program and rates structure to fit your budget.
FAVR programs, along with CPM (which we dive into in the next section), are the most adaptable to changing conditions. When employees drive more, your costs and employee reimbursements naturally go up. But if employees are driving less, you don’t have to reimburse them for the miles that aren’t driven, and your costs naturally go down.
In contrast, if you have a fleet or pay a flat allowance, you still have to pay all those costs even when vehicles are sitting idle or barely driven. Just imagine all the wasted spending when the COVID-19 pandemic first started: so many companies had recurring fleet costs even though employees weren’t driving and everything was shut down.
We’ve all seen during the pandemic how the companies that are able to adapt are the ones who survive and even thrive. That’s why FAVR and CPM programs can wield a huge advantage over flat allowance and fleet—they provide companies with the power to adapt to even the most uncertain of conditions.
A Cents Per Mile (CPM) program is typically a good alternative to FAVR because it offers the same advantages of adaptability and being tax-free. It’s viewed as a fair and easy program to implement for teams that have relatively low to moderate mileage drivers.
One factor to be aware of with CPM, though, is that your costs can go up or down a significant amount depending on how much your employees drive. This volatility can make spending control and predictability more challenging. It also makes accurately tracking your employees’ work miles particularly important. Without measures in place to verify their miles, you could be over reimbursing them.
You may be tempted to go with a flat allowance program because of the financial predictability and simplicity. After all, the idea of providing a set $800 a month for using and driving a personal vehicle seems nice and easy. However, allowances have one very large drawback—they are considered income and as such create “tax waste”.
The monthly allowance is counted as a form of compensation similar to a salary, and thus subject to payroll and income tax. That means your employees will actually be taking home much less than what their actual allowance is, and you will be paying more on top of it. To make an allowance program work, it could be wise to add a 30% cushion to account for the taxes both you and the employee will have to pay.
Furthermore, employees may take advantage of allowance programs. Since each employee receives the same allowance, no matter how much they are driving, they may be motivated to drive less and therefore pocket the extra money from their allowance.
You can read more about the costs of a flat allowance compared to mileage-based reimbursement programs in our guide, The True Cost Difference: Vehicle Stipend vs. Mileage Reimbursement.
At this point, we’ve hopefully provided a good frame of reference for the different programs, but where do you go from here? Implementing a vehicle program can be daunting when you start to consider startup costs, change management and employee adoption.
With a fleet program, you first need to secure vehicles, which can be pretty hard right now. Then you need to manage both the vehicles and the employees that are driving them. Areas to oversee include fuel consumption and costs, insurance, vehicle lifecycles, maintenance and repairs, and more. If employees are allowed to drive the vehicles for personal use outside of work hours, you need to carefully track that mileage in order to stay compliant with state and federal regulations. Any personal use is considered a taxable employee benefit.
Likewise, with FAVR, you need a strong understanding of the related IRS codes that make it a tax-free program. There are quite a few laws and guidelines that must be followed in order to properly implement a FAVR program, such as base vehicle requirements, insurance information, monthly calculations of fuel costs and more. You’ll need to determine the fixed amount each employee should receive based on their local costs, as well as set their variable reimbursement rate for work miles.
And for any program, you should ensure employees track and submit their mileage and expenses. You could leave it up to them to figure out how to do so, whether that’s using a pen and paper log, jotting notes on their phone, inputting it on a spreadsheet or simply trying to remember all their trips at the end of a long week or month. As you can imagine, this process could be extremely time consuming and prone to human error for both drivers and the back office.
Another way is to equip all your employees with an app that automatically tracks their mileage and uploads it to a web dashboard for immediate visibility. Drivers don’t have to stress about remembering to log miles. You get all the details you need for IRS compliance without having to chase down employees. A reliable, GPS mileage tracker like Everlance delivers peace-of-mind and confidence that all mileage is accurate.
On top of that, a modern, technology-based solution can help streamline reporting, increase accountability and unlock valuable insights. Please get in touch to learn more about the benefits of a user-friendly platform!