Thinking about setting up a Fixed and Variable Rate (FAVR) reimbursement system for your team? The simplest path for most businesses is to work with a dedicated FAVR provider.
They’ll handle the heavy lifting, helping you build the right rate, align with IRS requirements, and keep the numbers updated over time.
If you’d rather understand the basics first, this guide helps break down what goes into a FAVR allowance and how the numbers typically come together.
What is FAVR?
FAVR is a mileage reimbursement method that pays drivers a monthly fixed amount (e.g. $200) to cover ownership costs (like depreciation, insurance, and registration), plus a variable per mile rate (e.g. 0.25 cents-per-mile) for operating costs (like fuel and maintenance).
It’s designed to more closely match what it actually costs to operate a vehicle in the areas where your team works than a more common flat cents-per-mile rate.
Related: Fixed and Variable Rate (FAVR) Reimbursement Programs Explained | How To Implement a FAVR Program
The IRS’s annual mileage rate (currently $0.725 per mile in 2026) is a simple reimbursement rate many businesses choose to use, but that is calculated looking at the average total cost of operating a vehicle in the entire country. It’s a decent “one-size-fits-many” average, but FAVR offers a granularity that many companies prefer.
When set up correctly, FAVR reimbursements are even tax-free!
Is Creating a FAVR System Difficult?
Creating a FAVR system is usually significantly more complex than using a flat cents-per-mile rate since you’re building your rates from multiple cost components, local cost data, and mileage assumptions that you’re placing the burden on yourself to develop - plus, you need to follow specific IRS requirements.
To do so, you have to keep the program updated frequently as costs change, plus make sure your drivers are racking up enough business mileage.
The good news? Once it’s set up correctly, it can run extremely smoothly, especially when leaning on a FAVR provider to handle the calculations and ongoing maintenance.
What You Need to Calculate FAVR
Before running any calculations, you need to gather your foundational information and make a few program design decisions that’ll shape all subsequent rate settings. Inaccurate data at this stage can undermine your entire calculation.
Employee-Specific Information
First and foremost, each of your employee’s zip codes will offer a lot in terms of cost data for their rates. Things like insurance premiums, fuel prices, and registration fees can vary a lot by location.
The IRS defines “base locality” differently for fixed versus variable costs - fixed costs are generally based on where the employee lives, while variable costs reflect where the employee drives for work.
You’ll also need to categorize employees into annual “mileage bands”. The IRS requires a minimum projection of 6,250 annual business miles for FAVR calculations, and the bands typically span ranges like 10,000 - 15,000 or 15,000 - 20,000 miles.
Separately, employees must substantiate at least 5,000 business miles annually, or 80% of their projected annual business miles, if that number is greater to remain covered under the FAVR safe harbor (i.e., your FAVR payments can be treated as tax-free if you meet the IRS’s rules).
These bands are designed to recognize that per-mile vehicle costs decrease at higher annual mileage because fixed ownership costs spread across more miles.
Program Design Parameters
One of the most important things you need to determine with your FAVR setup is its standard automobile, a car that’s meant to represent the general class of vehicles your employees should drive.
You’ll choose a specific make, model, and trim level (e.g., a 2024 Honda Accord LX). The IRS publishes an annual maximum standard automobile cost, which currently stands at $61,700 for 2026.
In addition, employee vehicles must have cost at least 90% of the standard automobile’s cost when new, and must meet the vehicle age requirements relative to the retention period (how many years you assume the standard vehicle is kept before it’s replaced - more on that later).
Related: FAVR IRS Vehicle Age Requirements
Your retention period must be at least 2 years per IRS requirements, and it determines how depreciation is calculated. Ranges typically span 2 to 7 years, with shorter periods producing higher fixed rates but excluding employees with older vehicles.
As with everything with FAVR, this is up to you to determine based on your team’s unique needs, though working with a dedicated FAVR provider makes the process much easier and faster.
Cost Data Sources
Calculating FAVR requires reliable, current cost information for things like the standard automobile. You’ll need insurance rate data by zip code, state-specific registration fees and property taxes, fuel prices by region, and maintenance cost schedules.
This data must be “reasonable and statistically defensible” under the IRS’s guidelines, derived from your program’s base locality that you’ve determined, and should reflect retail prices paid by consumers.
Many programs use commercial automotive cost databases, government pricing data, and other industry tools to gather this information. Make sure your FAVR system is built to be updated as these numbers change, particularly for variable components like fuel that change frequently.
Calculating Fixed Rates for FAVR
The fixed rate component to a FAVR program is meant to cover ownership costs that stay relatively constant regardless of how someone drives. Think of them as expenses that continue even when the vehicle sits in traffic on the highway.
These costs are calculated annually, then divided by the number of pay periods.
The Depreciation Component
Depreciation usually represents the largest fixed cost. It reflects a given vehicle’s declining value over time.
FAVR programs calculate depreciation by taking the standard automobile’s cost when new, subtracting the residual value at the end of the retention period, and spreading that difference over the retention period in years.
The IRS provides safe-harbor residual value percentages for 2-, 3-, and 4-year retention periods (70%, 60%, and 50% respectively).
For example, a standard automobile costing $30,000 with a 4-year retention period and a safe-harbor residual of 50% would have $15,000 in depreciable value ($30,000 minus $15,000 residual), which results in a $3,750 annual depreciation over those four years.
For longer retention periods like 5, 6, or 7 years, the residual value must be a reasonable, defensible estimate. Additional luxury auto depreciation caps may also apply, further constraining the allowable depreciation component.
Some programs also offer optional high-mileage payments for business miles above the program’s annual business mileage assumption, but those optional payments are treated as taxable wages.
Related: Cents-Per-Mile Reimbursement vs FAVR - Which Is Right for Your Business?
Insurance, Registration, and Taxes
Insurance costs can vary dramatically by location, with urban areas and certain states seeing rates the likes of two or three times higher than rural or lower-cost regions. You’ll need to determine typical insurance premiums for the standard automobile in each employee’s zip code, using the coverage limits your program requires.
Registration fees and license costs are state-specific and sometimes vary by county or vehicle characteristics like age or value. These can range from under $50 annually in some states to several hundred dollars in others.
Personal property taxes on vehicles exist in some states but not others, adding another location-dependent cost layer. States like Virginia, Connecticut, and Missouri assess annual property taxes on vehicles, while most states don’t have this expense.
How to Create Your Fixed Rate for FAVR
Once you’ve gathered all of the fixed components for an employee in a specific location and mileage band, total them annually. For example, if the fixed costs sum to $7,800, divide by 12 for monthly payments ($650), by 24 for semi-monthly ($325), or by 26 for bi-weekly ($300).
The fixed amount remains stable throughout the year for each employee, providing predictable reimbursements to help cover ownership expenses like car payments and insurance premiums, regardless of how many miles they drove.
Calculating Variable Rates for FAVR
In FAVR, the variable rate is meant to cover any operating costs that increase proportionally with driving. Think expenses that one incurs to keep the vehicle running.
These are calculated as per-mile costs that get multiplied by actual business miles driven each period.
Fuel and Operating Costs
Fuel represents the most visible and volatile variable cost component. You’ll need to calculate the per-mile fuel cost by dividing local fuel prices by the vehicle’s fuel economy.
If gas costs $3.50 per gallon in an employee’s area and your FAVR system’s standard automobile gets 30 MPG, the fuel cost per mile is $3.50 / 30 = $0.117 per mile.
For electric vehicles, substitute local electricity rates and the vehicle’s kilowatt-hours per mile.
Maintenance and Tire Costs
You’ll determine the per-mile maintenance costs from your standard automobile’s manufacturer-recommended service schedule. Oil changes, fluid replacements, filter changes, and routine maintenance occur at specific mileage intervals, which allow you to calculate an average per-mile cost.
Tire wear adds another per-mile expense based on replacement tire costs divided by expected tire life. A set of tires costing $800 with a 50,000-mile life expectancy will result in $0.016 per mile in tire costs.
Related: Mileage Reimbursement Method Comparison
How to Create Your Variable Rate for FAVR
To create your FAVR system’s variable rate, you need to add up all of the per-mile costs together.
For example, if your calculations result in fuel costing $0.117/mile, maintenance $0.048/mile, and tires $0.014/mile, the total variable rate would be $0.179 per mile.
FAVR programs often refresh their variable rates monthly or quarterly to reflect changing costs (especially fuel prices), but the IRS requires periodic variable payments to be made at least quarterly.
More frequent updates help ensure rates reasonably approximate current expenses.
The Basic FAVR Calculation Formula
Total FAVR reimbursement for any period equals: Fixed Amount + (Variable Rate x Business Miles Driven).
An employee with a $600 monthly fixed amount and a $0.18 per-mile variable rate who drives 1,200 business miles receives: $600 + ($0.18 x 1,200) = $600 + $216 = $816 total reimbursement that month.
Factors to Consider
The fixed portion ensures employees receive a consistent reimbursement payment to cover ownership costs even during slow months with fewer business miles.
If that same employee only drives 400 miles the next month, they still receive the full $600 fixed amount plus $72 variable ($0.18 x 400) for $672 total.
During busy months with higher mileage, the variable portion increases proportionally while the fixed amount stays constant. This structure naturally balances predictability with responsiveness to actual driving costs.
The formula applies regardless of pay frequency. Whether you pay monthly, semi-monthly, or bi-weekly, you’re simply using the fixed amount appropriate for that period length plus the variable calculation for miles driven during that timeframe.
Why Most Companies Use a Dedicated FAVR Solution
The data gathering, calculation complexity, and ongoing update requirements make FAVR challenging to manage manually.
Collecting location-specific insurance rates, fuel prices, and tax information for dozens or hundreds of employees across multiple zip codes quickly becomes overwhelming for even large enterprises.
Beyond initial rate setting, FAVR programs require regular variable rate updates as fuel prices change, annual fixed rate reviews, employee compliance monitoring, and vehicle declaration tracking.
Most organizations either partner with a FAVR vendor who specializes in rate calculation and program administration. These solutions maintain cost databases, handle calculations, and provide the documentation needed for IRS compliance.
For mileage tracking (essential for both calculating variable reimbursements and meeting IRS substantiation requirements), automatic mileage tracker apps like TripLog eliminate manual logging errors and ensure accurate business mile documentation.
Dedicated mileage trackers capture trip details automatically, create compliant reports, and often can integrate directly with FAVR systems to streamline your entire reimbursement process!
Related: Mileage Reimbursement Explained | How To Set Up a Mileage Reimbursement Policy for Your Business
Calculating a FAVR Allowance FAQ
Q: What’s the hardest part of calculating FAVR?
A: Gathering accurate, location-specific cost data for all employee locations is typically the biggest challenge. Insurance rates, fuel prices, and local taxes require reliable data sources, and manually collecting this information for multiple zip codes is extremely time-consuming.
Q: Can I use a simple calculator or spreadsheet for FAVR?
A: While technically possible for perhaps very small programs, spreadsheets become impractical at scale. Most organizations partner with specialized FAVR vendors to save time and reduce error risk.
Q: How often do FAVR rates need recalculating?
A: Variable rates typically update monthly or quarterly to reflect changing fuel and operating costs, and the IRS requires periodic variable payments to be made at least quarterly. Fixed rates generally remain stable throughout the calendar year and are reviewed annually. The specific frequency depends on your program design, but more frequent updates (especially for variable rates) ensure employees are reimbursed fairly as market conditions change.
Conclusion
FAVR calculation requires detailed cost data, careful methodology, and ongoing updates to maintain accuracy and compliance.
While the basic formula is straightforward, the data gathering and rate-setting complexity leads most organizations to use specialized vendors rather than doing calculations on their own.
Curious to learn if FAVR is right for your team? Schedule a call with the mileage experts at TripLog today!
