FAVR: What Is a Fixed and Variable Rate Allowance?
A FAVR plan reimburses employees using their own car for business purposes with a combination of a monthly allowance and mileage reimbursement. The fixed and variable rate reimbursement is a method of compensating workers who use their personal or leased automobiles for work-related purposes. According to Internal Revenue Service (IRS) requirements, FAVR payments must be provided at least quarterly for tax qualification. The IRS also imposes certain limits on how and how much an employee’s car must be utilized to qualify for the FAVR allowance.
When determining the employee’s reimbursement, a FAVR car allowance considers both fixed, localized costs as well as variable costs. For example, fixed costs would include expenses like insurance, depreciation, and registration. Variable costs would include gas, oil, and maintenance.
A standard car allowance or mileage reimbursement alone does not differentiate between expense types. Nor does it set rates based on local costs. These glaring flaws result in mistakes, inequitable reimbursements, and potentially expensive repercussions. The FAVR allowance reimbursement rates are based on the most appropriate standard vehicle required for the employee’s position. It provides for equitable baseline expenditures with fair, timely payouts. Each employee receives a fixed regular payment similar to a car allowance. In addition, they receive a variable cents-per-mile fee that increases and falls in tandem with fluctuating expenditures. All prices depend on the employee’s zip code and a standard vehicle.
FAVR Fixed and Variable Rate Allowance – A Closer Look
A fixed and variable rate allowance program is often referred to as a mileage reimbursement plan or a fixed and variable plan. Employees are reimbursed through a mix of monthly allowance and mileage reimbursement payments. A FAVR has the benefit of being adjusted to each employee’s location-specific expenses and real monthly miles. This is as opposed to a flat car/business travel allowance. When correctly implemented, such a system can prevent employees from being overpaid or underpaid.
At its core, a fixed and variable rate allowance has two payment types: fixed payments and variable payments. The monthly fixed payment covers the fixed costs of driving and owning the car. This includes expenses such as depreciation, insurance, registration fees, and taxes. The total cost of these expenses is computed and then modified to account for the percentage of time the vehicle is utilized for business activities. Fuel, oil changes, tires, and basic maintenance are all part of the quarterly variable payment.
The IRS has set the standard mileage rate for business use of a vehicle at 58.5 cents per mile in 2022. This is up from 56 cents per mile in 2021. For charitable uses in both 2021 and 2022, the fee is 14 cents per mile. In 2022, the standard rate for medical care usage and moving is 18 cents per mile, up from 16 cents in 2021. Annually, the amounts are modified to reflect changing transportation costs. Many people believe that FAVR is more realistic than the IRS standard mileage rate. This is because it takes into account an employee’s particular fixed and variable costs for operating a car. These are expense amounts that might vary based on factors such as vehicle type, fuel and insurance prices, and local taxes.
IRS Standard Rates 2022
The Internal Revenue Service today issued the 2022 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs. Beginning on January 1, 2022, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 58.5 cents per mile driven for business use, up 2.5 cents from the rate for 2021,
- 18 cents per mile driven for medical, or moving purposes for qualified active-duty members of the Armed Forces, up 2 cents from the rate for 2021 and
- 14 cents per mile driven in service of charitable organizations; the rate is set by statute and remains unchanged from 2021. (Source: irs.gov)
FAVR – Fixed and Variable Rate Allowance: What to Know
Consider a large company with employees working in various locations nationwide. Gasoline and other expense allowances might be established for employees in Texas, where fuel is relatively inexpensive. However, these rates may not make sense for employees in New York or California. In those locations, fuel and related expenditures are substantially more costly. Nationwide, pricing differences may also include significantly higher registration fees and inspection costs. Some regions may require a greater frequency of such costs, and higher maintenance and repair prices. A FAVR plan can be adjusted to compensate for variances in local pricing.
FAVR Fixed Costs
The fixed payment is calculated by adding together the fixed vehicle ownership costs. These costs include:
- Depreciation – Calculated for the “standard auto” for the employee group
- Taxes – Personal property taxes for the “standard auto” for the employee group
- Insurance – Rates in the employee’s zip code and their group’s “standard auto”
- Registration – License and registration fees in their state
The total fixed costs for the year are divided by twelve to determine the monthly payment. While costs are based on a representative “standard auto,” employees have the flexibility to choose any vehicle they want. As long as it meets certain value and age requirements relative to the standard auto. The standard auto can be different for different employee groups, such as managers and junior reps. This customization also gives companies flexibility to meet their budget and benefits goals. Also, ensuring employees are showing up at customers with a vehicle that aligns to the image they want to project.
FAVR Variable Costs
The variable rate is calculated by adding the variable vehicle operating costs. These costs vary based on location and vehicle type. Variable costs include:
- Gasoline – Fuel prices in the employee’s area
- Tires – Tire prices for the employee group’s “standard auto”
- Maintenance – Cost of oil changes and other routine maintenance for the employee group’s “standard auto”
Variable rates are also modified on a regular basis to reflect changes in gasoline prices. The variable payment to an employee is then computed by multiplying their variable rate for the period by the amount of miles driven during that time.
FAVR Fixed and Variable Rate Allowance vs. Per-Mile Reimbursement
FAVR programs are a bit more complex but tend to be flexible and fair with their fixed and variable rate breakdown. Still, some firms prefer to pay employee expenditures fully through a mileage-based method. However, such a system may fail to account for changing pricing, such as rapidly rising gasoline prices. Additionally, they may not be tailored to the higher or lower prices of a rural area or city. This can result in an over-or underpayment. Per-mile reimbursement programs tend to be one-size-fits-all. Conversely, FAVR allowance schemes take into account each employee’s unique expenditures.
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