Vehicle Programs: The Guide to Vehicle Reimbursement Programs
Vehicle programs. Whether you’re in the pizza business, the healthcare space, construction, any of the numerous business services markets or some other industry, chances are you have one. Vehicle programs, also referred to as business vehicle programs or vehicle reimbursement programs, are a part of business operations. They’re often so much a part of what your company does, it’s hard to imagine there are types outside of the one you’re currently using. It’s even harder to imagine that your company might be using the wrong one. So what goes into a vehicle program? And what makes a vehicle program right for your company?
What is a vehicle program?
A vehicle program is how your company provides, or reimburses, its employees’ business miles driven. That travel could be anything from a sales rep driving to meet prospects or waste management teams collecting garbage across the city. There are different needs for vehicle programs, so there are many different types to consider which we will cover below.
The Types of Vehicle Programs
Vehicle programs have developed from the various ways companies need driving employees. A sales representative driving for an enterprise company across a vast territory is unlikely to operate with the same vehicle program as a traveling nurse working for a clinic in a smaller community. Therefore, different vehicle programs have developed to meet the needs of the company.
The top five vehicle reimbursement programs are:
- Fleet or company provided vehicles: A fleet vehicle program is when a company provides its employees with a car for business purposes
- Car allowance: A car allowance, also known as flat allowance, program provides employees with a flat compensation every month to cover driving expenses.
- Cents-per-mile or mileage reimbursement: Companies with cents-per-mile (CPM) programs – or mileage reimbursements – have employees report their business mileage and reimburse them a set rate per mile
- Fixed and variable rate reimbursement: Fixed and Variable Rate (FAVR) programs reimburse employees for their individual fixed and variable driving costs, scaling according to the amount of mileage people drive.
- Hybrid vehicle program: Companies may use two or more programs to meet the needs of the company.
The Goal of a Vehicle Program
Vehicle programs exist to support the efforts of the company. That may be providing the company’s product through service operation or growing the business through sales. Just as companies are supported by the employees driving for work, they must support those same driving employees. Vehicle programs also exist to see that these employees receive appropriate reimbursement.
How Business Vehicle Programs Work
When a company implements a business vehicle program, they do so to ensure their employees are equipped to perform their role with the company. For some companies, that’s providing leased or outright purchased fleet vehicles. For other companies, that’s setting up methods to expense business driving mileage. Driving employees use their own vehicles or company provided ones, for business purposes and often personal reasons as well. Below are the more in-depth summaries of the most popular business vehicle programs.
Fleet or Company-Provided Vehicles
Fleet programs are one of the more popular company car programs. They’re also the most expensive. The average annual cost of a mid-size SUV fleet vehicle per employee is $12,385. That’s nearly $4,000 more than other vehicle program alternatives. And that figure doesn’t take into account the constant exposure to liability.
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Why are fleet vehicles an expensive vehicle program? One of the highest expenses of fleet vehicles is the vehicles themselves. Leasing or outright owning them are both expensive options. But your company is also paying for routine maintenance, vehicle repair and fuel costs. Say a driving employee leaves the company. The company still has to make lease, interest and licensing payments. Idle vehicles cost companies an average of $648 per month.
There are some industries that require utility vehicles that employees would have a tough time securing outside of the job. Garbage trucks, powerline trucks and tree trimmers to name a few. But not every company needs to provide their employees with a vehicle, no matter how much of a perk they think it might be.
Car allowance vehicle programs are popular because they’re easy to set up and manage. No matter how much or how little your employee drives, you give them a few hundred dollars a month. But what makes it the easiest option also makes it a bad one.
Most companies don’t realize the tax implications that come with a vehicle allowance program. For example, the average car allowance in 2021 was $575. However, because a car allowance isn’t attributed to mileage, it’s taxed as additional income. Employees only see $393. Due to payroll tax, car allowances also cost employers more.
Beyond being a taxable payment, car allowances don’t always cover the costs of driving personal vehicles for business. Employees receiving an allowance will not be compensated if they drive beyond the miles the stipend covers. This incentivizes them to drive less. While an accountable allowance can substantiate mileage, it does little to make the reimbursement more fair or accurate.
Most companies use the standard IRS mileage rate as their reimbursement rate for employees. It’s rather easy to implement and, if carried out correctly, it can be tax free.
The difficulties with this vehicle program lie in two main areas. The first is proper mileage tracking. Employees are required to log a few essential pieces of information before and after each business trip. That doesn’t always happen, or at least not correctly. Mileage fraud can be a large issue.
The second is equity. Employees across the company receiving the same cent-per-mile rate may seem fair, but gas prices, insurance and other driving costs vary. That variation isn’t just state to state, but within each state too. A driving employee in California might pay $4.68 for gas while another driving employee in Mississippi pays $3.12. To provide both with the same rate is far from fair.
A FAVR program accounts for the geographic cost differences for each employee’s location. This program has no tax waste and accurately reflects each individual’s business mileage. When properly administered, FAVR programs are tax-free, benefiting employers and employees. What’s more, FAVR is the only reimbursement method recommended by the IRS.
The right Fixed and Variable Rate program looks at both fixed and variable costs of owning and operating a vehicle. Fixed costs don’t see much fluctuation and include expenses like insurance payments and license and registration fees. Variable costs change rapidly and include expenses like tires, maintenance and fuel. Companies providing a FAVR reimbursement to employees ensure they receive fair and accurate payments. A proper reimbursement may be viewed as a recruiting and retention benefit, especially during periods of high gas prices.
Much like the various industries in need of vehicle programs, companies often need different vehicle programs for different employees. It is not unusual for employers to use more than one vehicle program. For example, they may offer a mileage reimbursement program for employees that don’t drive over 500 miles each month and a FAVR program for those that do. This is especially true of employers that are larger and have more employees and various locations.
How do I choose a vehicle program for my company?
The vehicle program(s) your company decides on depends on the size and needs of your company. Consider these questions:
- How many driving employees does your company need?
- What is the average mileage they’re expected to travel each month?
- Will your vehicle program extend beyond one region? Will it involve multiple states?
- Does your industry require specialty vehicles to perform essential work?
Whether you are concerned over potential issues of an idle fleet, the tax waste associated with car allowances or mileage fraud with a cents-per-mile program, there are solutions to most of these vehicle programs.
Getting Started with a Vehicle Reimbursement Program
Once you’ve answered the above questions and found what you need from your vehicle program, it’s time to put the foot on the gas. You can set up a vehicle program policy in house, but that may create more of a mess than its meant to fix. Outsourcing your vehicle program can still save you money and lift the administrative burden of rolling one out internally. What are you looking for in a vehicle program vendor?
At the end of the day, the right vendor solves the pain points in your vehicle program without creating additional ones. The ideal vendor comes with years of expertise providing solutions to satisfied customers of all sizes and from all industries. They should also have a robust platform for both accurate calculation and reimbursement processing. Implementation should be easy and the program should be created to scale with the climate of the economy. Reach out to a few options and see how they compare with each other.
Transform Your Vehicle Program with Motus
If you’ve made it this far, you know we’re in the vehicle program business. With over 40 years of experience under our belt, we’ve helped hundreds of companies across various industries transition from their previous vehicle program to what they’re currently operating. Our platform provides comprehensive data to ensure employees receive fair and accurate reimbursements while companies control costs and remove administrative burden. If you’re looking to take the next step, you can contact us to set up a meeting and walk through how our solutions can meet your needs.
If you’re still looking into vehicle programs, you can learn more about your vehicle reimbursement program options in our guide: Business Vehicle Programs 101.