What is a FAVR car allowance?
There’s no way around it. If you use a flat-rate auto allowance program for reimbursements, you and your employees are losing money. Allowance programs are treated as part of your employee's income by the IRS. So, they’re assessed for payroll and income tax: but you—and your wallet—already knew that. What you might not know? There are alternative programs that avoid tax deductions altogether.
The Fixed & Variable Rate (FAVR) allowance plan is a reimbursement program designed for employees who use their personal vehicles for work. But here’s the twist: it’s 100% tax-free, as long as you and your drivers are compliant. A tax-free reimbursement plan such as this dramatically offsets driving costs. In fact, businesses see a 30% cost reduction in their vehicle allowance programs on average. FAVR offers other great benefits beyond skipping taxes. It’s very fair, very accurate, and with the right provider, will save drivers and admin hours every week.
Why FAVR is more fair to employers and employees than flat-rate auto allowance programs
Many companies stick with flat-rate allowance plans because they are easy to set up. It’s a valid point. FAVR is definitely more difficult to set up, and usually requires an outsourced provider to implement and maintain the program. But, FAVR is extremely fair to both drivers and employers. Unfortunately, those one-size fits all fixed-rate allowance plans often fail when it comes to fairness.
With reimbursements, fairness is vital. Not only does this lead to better pay and profit, it increases employee retention and attracts new talent. Talented workers have more options than ever, so offering an attractive compensation package is essential.
Let’s cover exactly what makes FAVR so fair.
1. FAVR is location specific.
Both FAVR and flat-rate auto allowance programs certainly intend to reimburse employees in full, but flat-rate programs suffer from a blind spot that results in inaccurate reimbursements: for example, its reimbursements are not location-specific. The USA is a big place, and the cost of driving in one region might be very different from another. Region affects not only gas prices, but insurance, tax rates, and other fees. Flat-rate auto allowance isn’t equipped with the flexibility necessary to address these differences in cost.
Meanwhile, FAVR is designed to reimburse drivers as accurately as possible, and when it comes to reimbursements, accuracy and fairness effectively mean the same thing. FAVR offers location-specific rates, so a driver’s reimbursement will partly depend on the region in which they drive. This ensures that drivers living in a region with low driving costs won’t be overpaid, while drivers living in a region with high driving costs won’t be underpaid. Ideal both for drivers and the companies they work for.
2. FAVR bases rates on a company standard vehicle
Rarely does one need a fancy car to do their job. An affordable, fuel-efficient vehicle will deliver drivers to their destination just as well as a Ferrari. So why should employers pay for their employees’ Ferrari, when a Kia could get the job done too?
That’s where company standard vehicles come in. Under FAVR, companies can select standard vehicle profiles—cars that are deemed suitable for work. Employee reimbursements are based on the standard vehicle, not on whatever car they own. By standardizing employee vehicles, companies are protected from reimbursing their drivers for unnecessarily high vehicle costs. This does not mean that drivers need to purchase the standard vehicle. They can drive any car they choose, but their reimbursement will reflect the company standard vehicle.
3. Drivers are protected regardless of their mileage
Under FAVR, drivers don’t need to worry about driving extra miles to cover their car expenses, or driving fewer miles so they don’t exceed their allowance. They’re protected regardless of how much, or how little, they drive.
How to calculate FAVR reimbursements
A FAVR allowance covers fixed and variable expenses. Fixed expenses are unrelated to how much someone drives and do not change much from month to month. Examples of fixed expenses include vehicle license and registration fees, auto insurance, and depreciation. Variable expenses can vary widely depending on how much a driver uses their vehicle for work. Expenses include fuel, oil, tires, and maintenance.
To calculate a FAVR allowance, you’ll need to determine what the fixed portion of the reimbursement is and the variable portion respectively. Once you’ve done that, add the two together, and you should get a sense of what the FAVR allowance is.
How to calculate fixed reimbursements:
To calculate the fixed portion of an allowance, add up the following fixed expenses:
- The relevant state’s license and registration fees
- The company standard vehicle’s deprecation
- Personal property taxes associated with the standard vehicle
- The relevant state’s insurance rates for the standard vehicle
The total amount is how much drivers will receive to cover fixed expenses. Instead of being paid in full for the whole year, drivers are paid a portion of what they’re owed each month. To calculate the monthly reimbursement, divide the total amount by 12.
How to calculate variable reimbursements:
Variable reimbursements will change month to month to reflect a driver’s total mileage and gas prices. To calculate the variable portion of an allowance, add up the following expenses from the month. You only need to consider expenses from the days employees are driving for work (ie. Monday to Friday).
The total amount is how much drivers will receive to cover variable expenses from the month. All these expenses are calculated based on the relevant driver’s ZIP code, so Houston drivers pay for Houston gas, LA for LA gas.
To learn more about calculating FAVR allowances and other mileage reimbursements visit this blog.
How does the IRS mileage rate affect FAVR reimbursement rates?
Every year, the IRS sets a standard mileage rate for personal vehicles driven for work. Under some programs, the total car allowance must remain below this rate or the delta will be taxed. But under FAVR, the total allowance can exceed the IRS standard rate, as long as your business is compliant. This is partly why FAVR compliance measures are so thorough—it helps ensure that the reimbursement your drivers receive is reasonable.
Is FAVR right for your business?
Not every business qualifies for FAVR. To qualify, both your business and your driver’s personal vehicles must meet the following criteria:
- Your business must have at least 5 employed drivers who use their personal vehicle for work.
- Your drivers must drive more than 5,000 miles for work a year.
- Your company’s standard vehicle must cost less than $56,100.
Driver vehicle requirements:
- Your drivers’ personal vehicles cannot be more than 7 years old (or fewer if your company’s retention cycle is shorter).
- Drivers must have purchased their personal vehicles for at least 90% of the program standard vehicle cost.
The companies that will benefit the most from FAVR are ones that have employees spread out across multiple states, require more than one standard business vehicle, and have high mileage drivers.
If you’re interested in learning more about whether FAVR is right for your business, get in touch.
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.