Use this calculator to estimate the Fixed and Variable Rate (FAVR) reimbursement for employees using their personal vehicles for business. FAVR plans are IRS-compliant and provide a tax-free reimbursement that covers both the fixed costs (like depreciation, insurance, and registration) and variable costs (like fuel, maintenance, and tires) associated with vehicle use.
Reimbursement Summary:
Enter values and click "Calculate" to see your FAVR reimbursement estimates.
Understanding FAVR Reimbursement
A Fixed and Variable Rate (FAVR) reimbursement plan is a sophisticated and IRS-compliant method for employers to reimburse employees for the business use of their personal vehicles. Unlike a simple flat car allowance or a mileage-only reimbursement, FAVR accounts for both the fixed and variable costs of vehicle ownership and operation, providing a more accurate and fair compensation.
How FAVR Works
FAVR plans are structured around two main components:
Fixed Rate: This component covers the predictable, non-mileage-dependent costs of owning a vehicle. These typically include depreciation, insurance premiums, vehicle registration fees, and property taxes. The fixed rate is usually paid out as a monthly allowance, regardless of the miles driven in a given month. It ensures that employees are compensated for the significant upfront and ongoing costs of having a vehicle available for business use.
Variable Rate: This component addresses the costs that fluctuate directly with vehicle usage. These include fuel, oil, tires, and routine maintenance. The variable rate is paid on a per-mile basis, similar to a standard mileage reimbursement, but it is often calculated more precisely based on local fuel prices and vehicle-specific maintenance estimates.
Benefits of a FAVR Plan
IRS Compliance & Tax-Free: When structured correctly, FAVR reimbursements are non-taxable to the employee and tax-deductible for the employer, offering significant tax advantages over taxable car allowances.
Fairness & Accuracy: By separating fixed and variable costs, FAVR provides a more equitable reimbursement. Employees are compensated for the true cost of having a vehicle ready for work, and for the actual expenses incurred while driving for business.
Cost Control for Employers: Employers can better manage and predict their vehicle program costs, as the fixed component is stable and the variable component is tied directly to business activity.
Employee Satisfaction: Employees appreciate a reimbursement plan that accurately reflects their expenses, leading to higher satisfaction and retention.
Flexibility: FAVR plans can be tailored to different regions and vehicle types, accounting for variations in fuel prices, insurance costs, and vehicle depreciation across different areas.
Key Considerations for FAVR
Implementing a FAVR plan requires careful administration to ensure IRS compliance. This includes:
Substantiation: Employees must provide substantiation of their business mileage.
Vehicle Requirements: There are specific requirements for the type and value of vehicles that can be included in a FAVR plan.
Geographic Adjustments: Fixed and variable rates often need to be adjusted based on the employee's geographic location to reflect local costs.
Our FAVR Reimbursement Calculator helps you get an initial estimate of these components based on common inputs, allowing you to understand the potential structure of such a plan.