Employers with staff who use their personal vehicles to conduct business will likely reimburse their employees for travel expenses. There is no federal requirement requiring them to reimburse, but most companies usually do.
In addition, while there is no federal requirement, individual states may have reimbursement requirements that employers and business owners must follow.
It can be very beneficial for employers to have a mileage reimbursement plan in place, as these business-related expenses are tax-deductible. In addition, having a mileage reimbursement plan in place will make your company that much more attractive to prospective employees.
Employer Mileage Guide: The IRS Standard Mileage Rate
In addition, employees should know that any amount they receive up to this amount is tax-exempt. Any reimbursement they receive over this amount is subject to standard income tax.
Employer Mileage Guide: Different Ways For Employers to Reimburse For Mileage Expenses
Functionally, there are two different ways in which your company can handle reimbursements. The first one that they can use is to reimburse for expenses incurred while using your vehicle for business.
The second and generally more accepted method is for employees to properly track and report mileage expenses. Mileage tracker apps like TripLog accurately account for the overall costs associated with owning and operating a motor vehicle.
In the past, companies have used outdated pen-and-paper mileage tracking methods. However, these methods can leave your company subject to over-reimbursement and other types of fraud.
If you choose to use the second method, you will likely use the standard IRS mileage rate. Anything at or below that IRS-recommended mileage rate can be reimbursed to your employees tax-free. Anything over the amount is considered income and is subject to federal and state income tax.
Employer Mileage Guide: Mileage Allowance
Using a mileage allowance system is another option for employees. This is an allowance that is usually paid to the employee in advance, generally paid at the beginning of each month.
This system is designed to cover any transportation expenses that an employee might incur. This can be a challenging reimbursement method as it requires you to manage how much you’re providing with significant scrutiny on your end.
Don’t forget! If the allowance total given to the employee is higher than what the IRS standard mileage rate is, the average must be reported as income rather than reimbursement.
Employer Mileage Guide: Mileage Reimbursement
Mileage reimbursement is a fairly straightforward process. With that said, there are a few varieties that are worth discussing. The first one is using the standard mileage rate. The second one is using FAVR (fixed and variable rate).
Employer Mileage Guide: Using the Standard Mileage Rate
The standard mileage rate is one of the easiest ways of tracking and reimbursing employees who use their personal vehicles for work.
Employers should keep in mind that (in most states) they are not required to use the IRS standard mileage rate and that they may use their own rate. If this is the case, any additional reimbursement made to the employee above the IRS rate is subject to income tax.
Thus, it’s important to keep the IRS rate in mind if you choose to use your own mileage reimbursement rate. In addition, if your reimbursement (or lack thereof) causes the employee to fall below minimum wage, you will need to pay them the difference.
Employer Mileage Guide: Fixed and Variable Rate (FAVR)
If you feel like the IRS standard mileage rate is too simplistic or not fair for your particular region, there are other options. For example, you can set up a fixed and variable rate (FAVR) plan.
- The fixed rate is used to cover standard month-to-month costs such as insurance, lease payments, depreciation, etc.
- The variable rate covers variable costs such as gas, maintenance, and oil changes.
Employer Mileage Guide: Employers Should Have An Accountable Plan
To ensure that you’re reimbursements are tax-free, you must meet the requirements of an accountable plan. The rules of an IRS-compliant accountable plan are as follows:
- Any expenses must have a business connection – that is, your employee incurred deductible expenses while performing services on behalf of your business.
- They must adequately account for these expenses to you within a reasonable period of time.
- They must return any excess reimbursement or allowance within a reasonable period of time.
Each trip that qualifies to be reimbursed must be recorded by the employee and noted for a business purpose in their mileage logs. Also, recording each transaction’s receipt makes reimbursement that much simpler.
Using a powerful mileage and expense tracker like TripLog is a great way to ensure accurate reimbursements. For instance, TripLog’s OCR capabilities give your employees an easy way to track their receipts.
In addition, the IRS indicates that a “reasonable period of time” should be used to track, submit, and manage mileage expenses between an employer and employee. The timeframe suggested by the IRS is 120 days. Specifically, the IRS states on their website:
- Employees must receive an advance within 30 days of the time they have an expense.
- They must adequately account for their expenses within 60 days after they were paid or incurred.
- They return any excess reimbursement within 120 days after the expense was paid or incurred.
- They are given a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding advances. They must comply within 120 days of the statement.
Are There Any “Non-Accountable” Plans?
Any reimbursement method that does not meet the three rules provided by the IRS does not meet the requirements of an accountable plan. The IRS provides additional guidelines here to help explain how employers and employees should account for reimbursable expenses.
Employer Mileage Guide: All Employees May Not Be The Same
Since there are differences among employees in most companies, the IRS standard mileage rate requires that each employee qualifies individually. Records must be properly kept in order to meet the requirements of an accountable plan.
Companies should have someone that looks after the total business mileage incurred by their employees. To review the requirements for employees, you may refer to our employee mileage guide for more information.
Your One-Stop Mileage Shop
The easiest and most cost-efficient mileage reimbursement method is to use a company mileage tracker like TripLog. To learn more about how TripLog can help your company, schedule a complimentary demo request today!