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Mileage tracking
Automatic mileage logs

FAVR program
Fixed & Variable Rate reimbursement design & management

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Automatic transaction logs

CPM program
Cents Per Mile reimbursement management

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Solutions
For CompaniesFor Self-EmployedFor Partners
Products
Mileage tracking
Automatic mileage logs

FAVR program
Fixed & Variable Rate reimbursement design & management

Expense tracking
Automatic transaction logs

CPM program
Cents Per Mile reimbursement management

Deduction finder
Tax deduction review

Driver checkup
License, insurance and MVR verification
Pricing
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Vehicle Programs


THE ULTIMATE GUIDE TO VEHICLE PROGRAMS


DIVE INTO THE VARIOUS TYPES OF VEHICLE PROGRAMS, WEIGH THEIR BENEFITS AND
DRAWBACKS AND CONSIDER YOUR IMPLEMENTATION NEEDS

Posted on 
Apr 13, 2021
  by
Team Everlance

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.


TYPES OF VEHICLE PROGRAMS

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:

1. NO PROGRAM

The first program type is just as it sounds—no program. Employees drive their
own vehicles for work purposes without any reimbursement or compensation.

2. FLEET

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.

3. FIXED AND VARIABLE RATE (FAVR)

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.

4. CENTS PER MILE (CPM)

This program reimburses employees at either the IRS standard deduction rate or
an internally developed custom rate.

5. FLAT ALLOWANCE



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.


CHOOSING THE RIGHT PROGRAM

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?


FLEET VEHICLES

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.

Case Study: How a User-Friendly Mileage Platform Attracted More Employees


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.


FIXED AND VARIABLE RATE

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.


From the 2021 Report: Matching up Vehicle Costs and Employee Benefits Download
now

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.



CENTS PER MILE

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. 


FLAT ALLOWANCE

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.



VEHICLE PROGRAM IMPLEMENTATION

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-based app 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!


Let's talk









TEAM EVERLANCE

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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