Introduction
Many companies have a love-hate relationship with their business vehicle programs, but it doesn’t need to be this way.
No matter the industry, company culture or size, all employers need a business vehicle program capable of fairly and accurately reimbursing employees for on-the-job driving. Despite the wide use of these programs, navigating the best solution for your organization can be a complex undertaking.
However, organizations don’t need to lock themselves into one specific program. In fact, 64% of companies use two or more programs at the same time. There is no standard definition of the “best” business vehicle solution; the best is dependent on what works for your company and your employees.
Organizations don’t need to lock themselves into one specific program. In fact, 64% of companies use two or more programs at the same time.
Whether you’re a finance, sales, operations or HR leader, you’ve probably wondered: “How do we know we’re running the right program?”
Answering this question depends on a number of factors, including the types of driving your employees do, how frequently they’re on the road and the type of vehicles they need to drive for work. These, among other factors, represent a handful of inputs your organization must evaluate to make a strategic decision between a fleet program, allowances, mileage reimbursement or a combination of these approaches. It’s important to bear in mind that processes don’t need to be universal across your company, as it doesn’t make sense to treat both frequent and infrequent employee drivers the same.
Market pressures, new regulations and evolving employee demands can influence business vehicle program expenses and risk at a moment’s notice. Fortunately, your organization has the flexibility to modify or replace your programs at any point. For example, you might already use an allowance, but as your company grows and you manage employees across multiple locations, it may make more financial sense to transition to a cents-per-mile (CPM) or Fixed and Variable Rate (FAVR) Reimbursement program instead.
The following is an in-depth look at the four main types of business vehicle programs, including how the programs function in practice, their financial implications and their effects on employees
Allowance
Allowance programs are the simplest business vehicle solution: Employers pay workers a flat fee to cover driving-related expenses. While this is the easiest program to administer and budget for, this one-size-fits-all approach could result in windfall payments to some employees, and reimbursements that fall short of driving expenses for others.
Allowances are fixed amounts that often don’t represent any particular employee’s driving habits, such as the number of miles they log or their local fuel costs. To that end, allowances are taxable for both employers and employees, as they are considered a form of compensation, not an expense. Depending on their situation, however, companies can use this to their advantage, treating allowances as an extra benefit for employees, effectively functioning like a bonus.
These programs are best suited for organizations that want simplicity first and foremost, without concern for the potential tax burden. Because these programs are so easy to understand—and all driving employees receive the same amount—most employees perceive flat allowances to be a fair reimbursement method.
Financial Implications
The financial results of an allowance are straightforward and predictable. Program administrators simply multiply the allowance by the number of impacted employees. Unfortunately for employees and employers, allowances are subject to income and payroll taxes, which may significantly reduce the amount of take-home pay mobile workers ultimately receive.
Tax Implications of Allowances:
If an employer wants employees to net a certain dollar amount, they will need to tack on a significant cushion of up to 30% to account for taxes.
Effect on Employees
From an employee perspective, allowances give the illusion of fairness since all mobile workers receive the same fixed dollar amount. Allowances are not a direct reimbursement for driving expenses, but rather an additional form of compensation. There are no minimum driving requirements for granting an employee a vehicle allowance, giving organizations greater flexibility to use funds for reimbursement or additional compensation.
When used solely for mileage reimbursement, a set reimbursement fund can convince employees to take the most efficient route possible. Driving employees who incur costs beyond the allowance must make up the difference out of their own pockets, while those who keep their expenses below the allowance can treat the difference as surplus income. To reduce mileage, employees could try to avoid necessary travel (e.g., face-to-face customer meetings) or use other forms of transportation, such as Uber or rental cars, and expense the costs.
A critical downside of allowances is the reduction of employee take-home pay due to taxes. In addition, the tendency to over-reimburse drivers that traveled less, while under-reimbursing drivers that traveled more, can pose challenges. These programs also fail to account for regional differences in cost of living, fuel and vehicle maintenance, creating an unequal compensation program for organizations with a distributed workforce.
Allowance Scenario
Organization with 100 mobile workers: Each mobile worker receives $800/month for driving an average of 15,000 miles/year
OUTCOMES
- $9,600 Annual allowance per employee
- $2,880 Tax waste per employee
- $6,720 Employee annual net take-home
- $364,800 Total tax waste for the organization
Other Considerations
Allowances are rarely a sustainable long-term solution to mileage reimbursement, as flat allowances are virtually guaranteed to either under or over-reimburse mobile workers. Yet without access to mileage log data, it is impossible to determine who is potentially over reimbursed and who needs more money to cover driving costs.
One factor often overlooked with allowance programs is insurance. In most instances, employees aren’t required to have any specific personal auto insurance in order to qualify for a flat allowance. Though this eliminates paperwork, it also exposes organizations to tremendous risk and the expensive repercussions of incidents that occur when an employee drives for work.
Employees often don’t need specific auto insurance to receive a flat allowance, leaving organizations exposed to costly risk from work-related incidents.
Over time, employers also tend to consider allowances part of an employee’s compensation rather than as a reimbursement intended to cover legitimate business expenses. In some cases, this can result in employers rationalizing why salary levels are lower than the competition’s, making salary discussions more challenging.
That said, allowances are easy to administer and offer a high level of predictability. With only minimal back-office effort required, it’s easy for organizations to create or modify an allowance as business needs shift; there’s no real “legwork” required to begin using the program other than determining the affected employees and allowance amount.
Cents-Per-Mile (CPM)
Cents-per-mile (CPM) programs are some of the most common business vehicle reimbursement options. In fact, 79% of organizations use CPM for at least some of their employees. Under a CPM program, businesses reimburse driving employees at either the IRS business mileage standard—a national, standard rate used to calculate the deductible expenses of using a vehicle for work—or set a custom rate developed internally
The second component of these programs involves keeping business mileage logs to justify reimbursements and in case of an IRS audit, which requires organizations to ensure their mileage capturing systems are both accurate and complete. In other words, jotting down mileage on random business cards—or in different note-taking apps—isn’t enough.
To meet IRS criteria, drivers must report every trip’s start and end location, time and date, reason for travel and total distance. So long as these requirements are fulfilled (and the CPM rate is less than or equal to the IRS business mileage standard) reimbursements can be tax-free to employers and driving employees.
When CPM is Applicable
CPM programs are best for organizations with occasional employees who drive less than 5,000 miles per year for work. The main concern with CPM programs is accurately logging employee miles. Without outside verification, employees may dramatically overestimate their mileage. Even when self-reported miles are only slightly off, it adds up. For example, a 20-mile trip to the airport might truly be 17.5 miles, over time representing a significant (and unwarranted) expense.
Even small mileage errors add up. A 20-mile airport trip might truly be 17.5, creating significant (and unwarranted) expenses over time.
It’s also important to recognize that the IRS business mileage standard is based on averages, not necessarily the unique costs of driving in any specific location. This compels many organizations to set more realistic custom rates for their workforce.
Businesses may attempt to administer CPM programs unassisted, but the unreliability of manual logging—as well as the accuracy challenges, administrative burden and planning necessary to deploy automated mileage capture—usually demands third-party support or additional internal resources. Technology can help organizations implement mileage capture solutions and ensure mobile workers adopt and correctly use the tools.
The key to running IRS-compliant CPM programs relies on solid policies and controls. Generally, companies will want to log as much as possible automatically, and rely on driving employees to use manual means when absolutely necessary (ie. when reporting a trip’s purpose).
Another factor to consider with CPM programs is risk. Employers running a managed CPM initiative can set specific insurance requirements that employees must meet to qualify for the reimbursements. This helps organizations minimize their liability in the event of accidents or other on-the-road violations.
Financial Implications
Over time, CPM programs tend to over-reimburse mobile workers who drive frequently for work. In some cases, costs can quickly balloon out of control.
Without mileage capture technology, reimbursements under a CPM program can be less predictable than the spend associated with fleet or allowance programs. Implementing a mileage capture application is more than an investment in program compliance—it also gives employers unprecedented visibility into their business vehicle costs and increases productivity by eliminating the need to manually log miles. Data from mileage capture applications can be transformed into valuable insights that may be used to improve driving routes and minimize time on the road. Organizations that adopt mileage capture technology have been able to reduce mileage by as much as 25%.
Organizations that adopt mileage capture technology have been able to reduce mileage by as much as 25%.
Effect on Employees
With CPM programs, employee drivers have to keep accurate logs of business travel, but most of this activity can be automated and occur seamlessly in the background. They must be trained on the importance of properly recording this information. That’s because without complete logs, CPM programs will not comply with IRS standards and risk failing a potential personal or company audit.
Since the IRS business mileage standard was developed with employee drivers who log less than 15,000 miles a year in mind, employers that rely on it should closely monitor high-mileage drivers to ensure they’re not dramatically over or under reimbursed. Driving employees may also find that CPM reimbursements are unequal across geographic locations, which can be a cause of tension. For instance, the monthly costs of driving—including factors like fuel prices and insurance rates—in Des Moines are substantially lower than in New York City. A uniform reimbursement rate won’t account for these differences, leaving employees in more expensive markets under-reimbursed (and frustrated because of it).
Other Considerations
It’s important to note that CPM reimbursements qualify as expenses. When administered with the right mileage capture technology, CPM programs are simple, effective solutions for lower mileage drivers. Driving employees don’t have to worry about a paperwork burden for logging miles, and program administrators can remain relatively hands-off since the IRS business mileage standard is a fixed value that changes annually. Automating your CPM program with mileage capture technology is a great first step toward painting an accurate picture of the miles your workforce drives. Some organizations take CPM one step further, integrating insurance requirements into their programs to reduce risk and liability expenses.
Company-Provided Car Program
Fleets are one of the most traditional vehicle management programs. Organizations purchase one or a variety of vehicles and choose whether to assign them to employees or treat them as a pooled resource. Unlike other business vehicle programs, fleet vehicles are property of the employer and can be reassigned to new employees when needed.
When Fleet Programs Are Applicable
Subsidizing a collection of company-provided cars—not to mention their maintenance and insurance—is a major investment for many organizations.
71% of HR managers report that Millennials are less likely to ask for a company-provided car or vehicle reimbursement compared to Gen X and Baby Boomers.
In a few specific scenarios, fleets may be the most logical option. Fleet programs are a good fit when specialty or branded vehicles are required, or for equipment that needs to be hauled (e.g., plumbing contractors, construction workers, or municipal services). Few employees, for example, have utility trucks sitting in their driveways at home. Some companies wrap their vehicle with their branding for marketing purposes, like Red Bull’s Mini Coopers. For businesses in certain industries (like pharma), company-provided cars have traditionally been viewed as a perk and are ingrained deeply into their culture.
Today, the allure of the company-provided car can vary by employee age. For instance, 71% of HR managers report that Millennials are less likely to ask for a company-provided car or vehicle reimbursement compared to their Gen X and Baby Boomer counterparts. Before setting aside fleet funds (or deciding to continue a fleet program), business leaders should consider the demographics of their workforce and company objectives to ensure fleets align with their current and future needs
Financial Implications
The upfront costs of vehicles and fuel cards are the two primary financial implications of fleet programs. However, liability, damage and accident risk management become major concerns for organizations managing a fleet as well.
For starters, US traffic fatalities have continued to climb steadily year-over-year, with 12.06 fatalities per 100,000 Americans as of the latest OECD findings—up from just 10.40 in 2013. As such, accidents are a question of when and how bad, not if. Organizations will inevitably experience vehicle damage or injury to an employee and will need to manage subsequent costs and possibly legal fees
For employers, the average motor vehicle crash injuries on- and off-the-job cost employers $72.2 billion in 2018.
Employers are also open to increased manufacturer risk with fleets. Common defects in one of their selected models can translate into hundreds or thousands of repairs. Even if performed at the manufacturer’s expense, employers are left to suffer the costly mobile worker downtime (or price of short-term replacements).
On average, fleet vehicles cost employers 26% more than mileage reimbursement programs
In 2024, the auto industry recalled almost 28 million vehicles, while the rolling average for recalls has sat at almost 35 million for the past decade. Businesses must also account for the cost of storing and maintaining unused vehicles when employees leave the company.
On a positive note, fleet programs do provide employers with a consistent level of vehicle spending stability. There are standard models, fuel efficiencies, parts and maintenance costs that may be more predictable than under a CPM program.
The True Costs of Fleet Vehicles
vehicle costs
$8,700
Average Cost of Fleet Vehicles
$1,104
Average Annual Maintenance, Repair and Tire Costs
$2,860
Average Annual Fleet Vehicle Fuel/Oil Cost
Liability and Risk Costs
$78,000+
Average Cost of a Non-fatal Disabling Auto Accident
$1,000,000+
Average Cost of a Fatal Accident
80%
of Off-the-Job Crashes Account for Employer Crash-related Health Benefits Costs
Effect on Employees
Employee sentiment toward fleet programs has evolved dramatically over the years. Company-provided cars are no longer a prized perk or source of convenience in all driving employees’ eyes. Older employees tend to view a company- provided car as a benefit, and fleet programs can use this to their advantage to keep morale high and improve their reputation from a recruitment perspective. On the other hand, businesses looking to attract younger employees may find the benefit is less effective, as younger generations have a tendency to value autonomy in the workplace. As a result, businesses might have more success satisfying workers with programs that allow them to use their own vehicles.
Because company-provided cars are deemed fringe benefits by the IRS, employees’ use of fleet vehicles for personal errands and other non-business purposes is treated as taxable income. Today, 70% of organizations estimate that personal use accounts for up to one-quarter of the annual mileage accumulated across their fleets. Not only does personal use accounting create a financial burden on employee drivers, it creates more work for employers to calculate the fair market value of each employee’s fleet vehicle.
Other Considerations
As one of the most expensive and high-risk vehicle programs, businesses should turn to fleets only when it fills needs other programs cannot meet. For example, those with specialized branding or niche vehicle needs are the best candidates for a fleet program. Program administrators should also evaluate how imminent changes to lease accounting rules will affect their internal fleet management costs.
Given company-provided cars’ fringe benefits status, the IRS requires that each driving employee maintain an accurate mileage log of their personal use activity. Accurately capturing both business and personal mileage helps your company stay in compliance, even if an employee or your company is audited.
Fixed and Variable Rate (FAVR) Reimbursement
Fixed and Variable Rate (FAVR) reimbursement is widely considered a “best of breed” program that blends the fixed costs of operating a vehicle with geographically-specific variable expenses (such as fuel) to produce highly accurate reimbursements. FAVR programs are the fairest option for organizations, regardless of company size.
Employers start by choosing a vehicle model (or models) and setting insurance requirements that fit their organization’s objectives. For example, salespeople may need midsize sedans for highway driving and engineers may require pick-up trucks to navigate oil and gas fields. Employees driving personal vehicles for work that meet these business requirements are also eligible for reimbursement. FAVR isn’t limited to a direct make and model match of the vehicle selected, providing both employers and driving employees additional flexibility over vehicle choice.
Employee drivers receive a fixed sum, which is designed to cover insurance, taxes, depreciation and registration. Employees are also granted a variable CPM reimbursement scaled to the price of gas locally, which accounts for the cost of fuel, maintenance, oil, tires and other incidental expenses. This structure allows employers to provide fair and accurate reimbursements based on where mobile workers live and work.
When is FAVR Applicable?
FAVR is a great fit for geographically dispersed organizations looking to avoid under-or over-reimbursing their employees and account for regional driving differences. This is also a smart option for companies wanting to supplement their existing mileage programs with an option for frequent drivers, whose high mileage often distorts and highlights weaknesses in other business vehicle programs.
FAVR programs are the fairest option for organizations regardless of company size.
Financial Implications
FAVR avoids the capital drain associated with fleet programs, freeing organizations from buying and maintaining company vehicles. This offers the same benefits as an allowance plan, but at a 30% to 40% lower expense ratio. In fact, many businesses report saving $2,000 to $3,000 per driving employee.
In contrast to flat allowances, FAVR is a tax-advantaged program, ensuring employees are reimbursed for mileage tax-free. This represents a unique benefit among mileage programs, making FAVR especially attractive to employers and employees.
Effect on Employees
Under a FAVR plan, employees are reimbursed more precisely than is usually possible under other plans. Organizations with a large geographic footprint in particular reap the benefits of FAVR, since universal mileage reimbursements (whether through an allowance or CPM) tend to exacerbate cost of living differences.
FAVR programs also give employee drivers the flexibility to choose their own vehicle, rather than having a specific car or truck assigned to them. This structure opens the doors for additional employee benefits and incentive programs that other programs can’t accommodate. Employees, for instance, can take advantage of the resale value of their vehicle and rewards for cost-conscious driving. This also allows employers to engage with their staff on an individual basis, rather than grouping all drivers together under an allowance or CPM program.
FAVR vs Allowance Plan:
30-40%
Lower Expense Rate
SAVES PER MOBILE EMPLOYEE WITH FAVR:
$2,000 to $3,000
Other Considerations
FAVR programs, combined with advanced mileage capture technology and analytics, can generate powerful and actionable business intelligence. Many organizations already have the information they need to transform their business at hand but may lack the tools to accurately record or analyze available data. By tapping into mileage data with better tools, organizations can optimize sales routes, identify new markets and more accurately assess employee performance.
Reimbursement Comparisons
Based on one employee driving 15,000 miles/year for work
Allowance
$9,600
Yearly company impact
$800/month
CPM
$10,500
Yearly company impact
2025 IRS standard mileage rate of $0.70/mile
FIXED AND VARIABLE RATE (FAVR)
$6,900
Yearly company impact
Fixed Costs
(insurance, taxes, depreciation, registration) = $4,350
Variable Costs
(fuel, tires, maintenance) at $0.17/mile= $2,550
Conclusion
There is no wrong answer when searching for the best mileage program. Depending on your organization’s needs, there may be a time and place for fleets, allowances, cents-per-mile and fixed and variable rate programs. While it’s unlikely that any single reimbursement program will be a silver bullet, your company can combine several programs to meet its goals. A business might use CPM for occasional travelers, while using FAVR for more frequent mobile workers or those in geographies poorly represented by the IRS business mileage standard.
Consulting with a business vehicle solution provider can help your company identify hidden costs in existing reimbursement methods and find the right solution for your organization. Working with a third party grants your company the expertise to integrate different programs seamlessly, and the flexibility you need to move employees easily between reimbursement programs as your needs change. It’s important to choose a plan not only based on administrative ease of use, but also total cost to your organization. While an allowance program might be easy to administer, it could cost your company more in the long run if used to the exclusion of other options.
The right blend of business vehicle programs doesn’t only help your organization’s bottom line, it can help mitigate risk, provide value to operations and sales teams, and promote a healthy business culture. A personalized mileage reimbursement program minimizes the chance and fallout of safety issues, unpredictable travel costs and regulatory noncompliance.
Fairer and more accurate reimbursements can also alleviate and prevent employee grievances around business travel. Business vehicle programs can serve multiple purposes beyond mere reimbursement, from morale-boosting to altering benefit packages and generating new business insights