FAVR Reimbursement Explained

FAVR stands for Fixed and Variable Rate. It is a hybrid mileage reimbursement model: a fixed monthly stipend (covering depreciation, insurance, registration) plus a variable per-mile rate (covering gas, oil, maintenance).

Why employers use it

A flat per-mile rate over-pays low-mileage drivers and under-pays high-mileage drivers. The fixed costs of vehicle ownership (insurance, depreciation, registration) do not scale linearly with miles. FAVR adjusts for both, producing fairer reimbursement for fleets with mixed driving profiles.

How the math works

A typical FAVR plan pays around $400-$700/month fixed (depending on region and vehicle class) plus 14-22 cents per business mile. A driver doing 1,500 business miles a month at $500 fixed + 18¢/mile receives $770 total. A driver doing 3,000 miles receives $1,040.

IRS treatment

FAVR reimbursement is tax-free to the employee if the plan meets IRS substantiation rules under Section 1.62-2. The fixed portion typically tracks regional cost benchmarks; the variable portion tracks current fuel and maintenance costs. Both must be substantiated with logs and underlying cost data.

Where FAVR is common

Large fleets with mixed-mileage drivers: medical sales, pharmaceutical reps, field service technicians, regional managers. Small businesses usually stick with the simpler IRS standard rate or a flat car allowance.

FAVR vs IRS standard rate

FAVR can produce more equitable reimbursement than IRS-rate-only, but it is operationally heavier (vendor management, regional cost data, monthly fixed-cost recalibration). For most small employers, paying IRS rate per business mile is the right call. FAVR pays off at fleet size 50+.

FAVR vs car allowance

A flat car allowance is fully taxable; FAVR is tax-free if compliant. The administrative effort difference is meaningful but the tax efficiency usually justifies it for high-mileage roles.

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