Managing the Financial Side of Commercial Fleets

Types of Driver Reimbursement

May 2017, by Andy Lundin - Also by this author

Photo courtesy of pixabay.com
Photo courtesy of pixabay.com

There are four types of driver reimbursement models: IRS business mileage reimbursement rate, a fixed allowance, the Fixed and Variable Reimbursement Rate (FAVR), and a hybrid model that uses the FAVR guidelines but delivers the driver payment in a cents-per-mile model.

Every reimbursement method factors in five elements: depreciation, insurance, registration, maintenance, and fuel.

The IRS business mileage reimbursement rate is based on an annually study of the fixed and variable costs of operating a vehicle. The current rate as of print time is 53.5 cents per mile.

The other is the monthly fixed rate. The option give drivers a certain a number of dollars which acts as an allowance to operate the vehicles, but if a company is not collecting IRS compliant driver logs, this payment is taxable as income.

Then there’s FAVR, which provides a customized reimbursement rate that is based on individualized costs employees incur each month, and includes geographic and mileage-related cost that consider fuel prices and employees business mileage.

FAVR utilizes a fixed monthly rate for drivers by adding up depreciation, insurance, and registration. The last two are maintenance and fuel costs, with maintenance being broken into three categories: maintenance, tires, and fuel, according to Fournier. Meanwhile fuel costs are factored by zip code.

Lastly, a hybrid model removes the fixed payment of the FAVR program and instead, delivers the payments to the drivers based on zip code locality, but breaks the payment down to a cents-per-mile model. This means drivers that drive more than their FAVR miles would receive higher payments for these miles and conversely, drivers who drive less miles would receive a lower payment. This insures that a company never overpays or underpays a driver and better controls cost, all while maintaining their tax qualified status.

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