How to Calculate Mileage Reimbursements
The most basic way of calculating mileage reimbursements is to multiply your employee's mileage for a given time period by the reimbursement rate. The reimbursement rate could be the IRS standard rate, which is 62.5¢ currently, or it could be an actual costs rate, which would vary depending on your mileage reimbursement program.
What are mileage reimbursements?
Mileage reimbursements are payment programs designed to reimburse employees who drive their own car for business use. The mileage reimbursement rate may depend on a variety of factors, including region, year, and the company's standard vehicle.
Cardata offers three different mileage reimbursement programs: FAVR, CPM (Cents per Mile), and Tax-Free Car Allowance (TFCA). While the program details vary, they share the same primary goal: to reimburse drivers fairly and avoid tax deductions. The program that will work best for your business depends on how many drivers you have and their annual business mileage.
In this blog, we’ll cover how you can calculate reimbursements for each of these three mileage reimbursement programs—FAVR, CPM, and TFCA.
How to calculate a FAVR reimbursement
As the name suggests, a FAVR allowance reimburses drivers for the fixed and variable expenses associated with driving a personal vehicle for work. Fixed expenses are stable—the amount driven in a given month will have no impact on fixed expenses. In contrast, variable expenses change monthly depending on the business mileage a certain driver completes.
To calculate a FAVR reimbursement, you’ll need to determine the fixed and variable reimbursement separately and add them together.
Calculating fixed expenses
To calculate fixed expenses, find out the cost of the items listed below. Make sure that the prices you find are from the correct are within your state, and relevant to the current year.
- The relevant state’s license and registration fees
- The company standard vehicle’s depreciation schedule
- Personal property taxes associated with the standard vehicle
- The relevant state’s insurance rates for the standard vehicle
Once you’ve gathered the expenses listed, add them up. The total amount is what your drivers will receive annually to cover fixed costs. Instead of being paid in full, drivers are paid a portion of what they’re owed each month. To calculate the monthly fixed reimbursement, divide the total amount by 12.
Calculating variable expenses
You’ll need to determine the costs associated with variable mileage expenses. Make sure to find recent and region-specific expenses.
- Gas prices
Once you’ve collected the expenses, add them up. Then, create a reasonable per-mile rate for each of these items. One way to do this is by figuring out the cost per mile of each of these items. So if you drive 5,000 miles between oil changes, and oil is $20 a bottle, you get 0.4 of a cent per mile. Perform that calculation for each expense, and you'll end up with a variable figure. Most variable mileage reimbursements on a FAVR program are around 15¢ – ¢20 per mile.
Calculating the total reimbursement
To calculate the total reimbursement, add the total variable expenses with one-twelfth of the total fixed expenses.
- Calculate the monthly fixed reimbursement.
$1,200 (total annual fixed expenses)
/ 12 months
= $100 (monthly fixed reimbursement)
- Add the monthly fixed reimbursement with the month’s variable reimbursement.
20¢ variable mileage rate
x 2,800 monthly miles = $560 (variable)
+ 100 (fixed)
= $660 (total monthly reimbursement)
How to calculate a CPM reimbursement
A CPM mileage reimbursement program is a variable rate plan that pays drivers back for every business mile they drive. The amount a driver receives per mile depends on the IRS (Internal Revenue Service) standard mileage rate, which changes annually to reflect the ever-changing cost of driving. Each month, drivers are reimbursed for business mileage from the previous month.
To calculate a CPM reimbursement amount, multiply the total number of miles driven in a given month by the current IRS rate (62.5 cents in 2022). Your calculation should look like this:
# of miles x IRS rate = CPM mileage reimbursement
Let’s say that one of your employees drove 525 miles from September 1st - September 31st, 2022. Your calculation would look like this:
525 miles x 62.5¢
= $328.13 mileage reimbursement
How to calculate a Tax-Free Car Allowance mileage reimbursement
Given the highly flexible nature of the Tax-Free Car Allowance, the way you would calculate a mileage reimbursement depends on the details of your specific program.
TFCA reimbursements can be totally fixed (ie. a simple flat rate), totally variable (ie. a CPM rate), or a combination of both (ie. FAVR). The most rigid thing about TFCA is that reimbursements should stay below the IRS standard mileage rate. Otherwise, the overage will be taxed.
If your reimbursement is variable, your calculation will resemble the calculation used to determine the CPM reimbursement. If it’s both fixed and variable, it will resemble a FAVR reimbursement calculation. You can also simply pick a sum that you would like to use as your car allowance (for example, $500) and justify your expenses in accordance with IRS policy so that said allowance is tax-free.
When are mileage reimbursements used?
Employees who use their personal vehicles for business purposes can receive mileage reimbursements. “Business purposes” can include pick-ups, deliveries, and attending off-site meetings or conferences. Traveling from home to work or vice-versa, i.e. commuting, is not usually eligible for mileage reimbursements.
In most of the United States and Canada, employers are not legally required to reimburse their employees for business mileage unless the expenses result in an employee earning less than minimum wage.
As tempting as it may be to skip reimbursements, the extra few bucks might not be worth it. Offering a reimbursement program is attractive to talent, and it’ll help give your company some edge when it comes to recruiting and keeping great staff. It’s also a huge boost to morale. Employees work better when they feel like their employer cares about them. All in all, reimbursing your employees is an immensely smart business move.
Which mileage reimbursement program is right for my business?
Different programs suit different business needs. A company with over 5 drivers who drive more than 5,000 miles a year for work would likely benefit most from FAVR. CPM is ideal for companies with occasional drivers. TFCA is a more simple program with fewer compliance measures, ideal for small businesses or very casual drivers.
Are mileage reimbursements better than fleets?
Fleets are the most expensive vehicle program out there, costing 30% more than FAVR programs on average. As well as costly, they’re highly laborious—so much so that many companies hire administrators just to manage the fleet.
Not only are fleet owners responsible for purchasing and maintaining vehicles, but they also cover both business and personal expenses. In other words, fleet owners pay for their drivers to drop their kids off at soccer and run errands.
And even when they don't cover personal expenses, fleet programs still aren't ideal. That's because employees will have to pay personal use chargebacks, sometimes up to $300 a month, just to drive a car they don't want.
Fleet owners also carry all the liability for their fleet cars. Companies are listed as the owner/primary on insurance documents and are therefore required to deal with the damage done to the vehicle, regardless of the nature of the damage or the person responsible. This makes fleet ownership incredibly risky.
In contrast, mileage reimbursements are easier to maintain and can help keep business expenses to a minimum. Drivers are responsible for maintaining their own vehicles, and they pay for their personal mileage. Under mileage reimbursement programs, the employee is responsible for any vehicle damage, not the business owner. Plus, these are programs that employees actually want, because it gives them a reimbursement to drive the car they like.
Are mileage reimbursements better than flat-rate auto allowances?
Flat-rate auto allowances are considered part of an employee’s income, so reimbursements are subject to income tax. This leads to tax waste that adds up significantly over time. On average, companies using a tax-free mileage reimbursement program see a 30% reduction in the cost of their vehicle maintenance program.
Some mileage reimbursement programs (especially FAVR) are difficult to set up and maintain. Business owners often benefit from hiring a third-party business to do this for them. That’s where Cardata comes in.
Cardata uses GPS technology to track mileage and automatically keeps a mileage log, saving drivers hours of time and ensuring highly accurate variable reimbursements. We also keep track of compliance, so you and your drivers will never have any surprises on your tax returns.
Visit cardata.co/demo to speak with us about outsourced mileage reimbursements.
Disclaimer: nothing contained in this blog post is legal or accounting advice. Consult your lawyer or accountant and do not rely on the information contained herein for any business or personal financial or legal decision making.