What is a Cents per Mile mileage reimbursement?
Using the Cents per Mile (“CPM”) rate, companies reimburse their employees who use their personal vehicle to drive for business purposes. The IRS and CRA both set optional standard mileage rates in cents for employee vehicle reimbursements.
Is cents per mile a good reimbursement program?
Advantages of CPM
Some enterprises operate on fleets of company-owned or leased vehicles; others pay flat rate car allowances to employees to supply and drive their own car. These programs both have drawbacks. The former is expensive and administratively burdensome; the latter is subject to income and payroll taxation. For those reasons, employers opt for CPM.
To institute a CPM program, employers need to empower their employees to use their own vehicle for work. They must accurately log the miles driven by every employee, including the purpose of the trip and destinations. Then they reimburse drivers according to the standard rate set by the relevant tax authority.
In 2021, the IRS standard rate for reimbursements is 56 cents per mile. In Canada, the CRA rate for 2021 is 59 cents per kilometre (for the first 5000 kilometres—53¢ per mile after that). Below you can see a history of each organization's recommended rates.
The rates suggested by the IRS and the CRA are the maximum values that can be repaid to employees before the reimbursement is assessed for tax. Any amount paid beyond that figure is assessed for both payroll and income tax. This is done because organizations do not want reimbursements to become covert income payments.
Disadvantages of CPM
Cents per mile is not the only option for a business vehicle program.
CPM is meant to reimburse drivers for a variety of costs associated with purchasing and operating a vehicle. Insurance, depreciation, fuel, maintenance, tires—these expenses are all meant to be captured by the suggested CPM rates.
In practice, cents per mile programs do not perfectly reflect these fluctuating costs. Fuel prices change far more regularly than do the suggested rates, and different vehicles in different cities cost various amounts to insure. For this reason, employers often transition to fixed and variable rate (“FAVR”) programs.
CPM is chiefly useful for reimbursing employees that drive occasionally. It is suboptimal for companies who require employees to drive daily for business. Since no two vehicles cost exactly the same to own and operate, reimbursing equal sums to every driver leads to inequity.
High-mileage drivers tend to be overcompensated for their travel, whereas low mileage drivers tend to be under-compensated. This encourages employees to “drive for dollars”—to intentionally cover large distances on the highway for extra reimbursements. Low mileage drivers, by contrast, are discouraged from driving at all, since their reimbursements do not cover their fixed and variable automobile expenses.
For example, if a driver drove 5000 miles in LA for work in 2021, they would be reimbursed only $2,800. That number is not enough to cover even one of many common car repairs. Yet if their colleague drove 40,000 miles in rural Wisconsin in 2021, they would be reimbursed $22,400—enough to buy themselves a brand-new car.
For companies with drivers in diverse locales, the CPM model is unfair. A truly equitable system involves accounting for the assorted fixed and variable costs of all drivers. Cardata implements FAVR programs in the US to rectify those inequities, while also saving companies money. Cardata has designed a comparable FAVR program for Canadian companies, so that they can realize the same benefits.
US and Canada Standard Mileage Reimbursement Rates: a History
United States of America
IRS rates for 2011-2021
2017 (Tax Cuts and Jobs Act): 53.5¢
2011 (Q3 & Q4): 55.5¢
2011 (Q1 & Q2): 51¢
CRA first 5000 rates for 2015-2021:
CRA after 5000 rates for the same period:
In all of the years stated above, an additional 4¢ per kilometre is allowed for drivers in the Northwest Territories and Nunavut.
If you would like to discuss these advantages and disadvantages further, reach out to a Cardata vehicle reimbursement specialist today. If you would like to stay up to date with further developments in the vehicle reimbursement space, sign up for our email newsletter.
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.