It’s very common for an employee to use their personal vehicle to conduct business on behalf of their employer. The distance covered for business purposes in their car is referred to as the mileage calculation. There are a number of ways an employee might conduct business-related activities in this way, but the most important thing is to understand when mileage reimbursements are warranted and when they are not allowed.
Employees may have some questions as to whether they qualify for any reimbursements from their employer or not.
- If I drive a company car on behalf of my employer, will the mileage reimbursement be provided?
- If I use my own vehicle for business purposes, should my employer provide me with reimbursements?
- What is the best way to track mileage when driving for business purposes?
- Should I do mileage expense reporting each year for tax purposes?
- For company-related mileage expenses that are eligible for reimbursements, what qualifies?
I Drive a Car Provided by My Employer
If your employer is providing you a vehicle for various work-related purposes or activities, you are not eligible for tracking or reporting mileage expenses (outside of any tracking or reporting you or your employer might do strictly for internal purposes). You may be reimbursed for such expenses if you pay for gas, parking, tolls, or any other related expenses.
The specifics of how you should be reimbursed for your expenses that are incurred while operating a company vehicle should be made clear to you by your employer. This is different and separate from mileage expenses, which are for the purpose of drivers who own and operate a vehicle.
However, if an employer uses their own mileage rate, it is important for them to keep in mind that the rate should not be higher than official IRS mileage rates. Also, for recording each expense related to traveling, employees must make use of a proper mileage tracking logbook.
I Drive a Car Owned or Leased by Me
If you are the owner of a vehicle that you drive while conducting business for your employer, you are eligible for reimbursement for expenses incurred while conducting said business. Thus, it’s paramount that you use a mileage tracking app to easily perform mileage calculations according to standard IRS mileage rates.
There are two different ways in which your employer can easily handle reimbursements. The first one that they can use is to reimburse you for expenses incurred while using your vehicle for business. The second, and generally more accepted method, is to properly track and report mileage expenses. Mileage expense trackers, such as TripLog, accurately take into account the overall costs associated with the ownership of a vehicle.
If you choose to use the second method, the proper guidelines are provided by the IRS for mileage rates for businesses. It should be explained to you by your employer what the correct mileage rate is. Anything at or below that IRS-recommended mileage rate can be reimbursed to the employee tax-free. Anything over the amount is considered income and subject to federal and state income tax.
Different Ways to Reimburse Employees For Transportation Expenses
As mentioned above, there are two options available for an employer. One is to choose to reimburse for general automobile expenses, and the second is to provide reimbursement based on mileage. There are other ways of ensuring employees are reimbursed for costs associated with using their vehicle for company-related activities.
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 is a challenging method of reimbursement that can lead to an increase in tracking all receipts, ensuring that the expenses align with the allowance and that any allowance coverage is given back to the employer. Additionally, it is necessary for the employees to maintain a mileage log that is used to enter each expense of business travel with actual proof of receipts of expenses.
Don’t forget! An employer and employee should always keep in mind that, 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.
Mileage reimbursement is fairly a straightforward process. Employers and employees must be aware of the variations of this method. The first one is the standard mileage rate. The second one is the FAVR (fixed and variable rate).
Standard Mileage Rate
The standard mileage rate is one of the easiest and most straightforward ways of tracking and reimbursing employees for using their personal vehicles for activities that are related to your work. The IRS standard mileage rate is designed to make it very easy and straightforward for both the employer and employee.
An employer should keep in mind that 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. Hence, it’s important to keep the IRS rate in mind while fixing your mileage reimbursement rate.
Fixed and Variable Rate (FAVR)
An employer may also choose to use a combination of a variable mileage rate as well as a fixed cost to reimburse for other items:
- The variable rate is used to cover variable costs such as gas, maintenance, and oil changes.
- The fixed rate is used to cover standard month-to-month costs such as insurance, lease payments, depreciation, etc.
The Importance Of An Accountable Plan
In order to ensure that the amount an employee is getting in their reimbursement amount is tax-free, there are certain requirements of an accountable plan that an employer must meet.
- A business connection is a must for your expenses. It is important for you to have paid or incurred deductible expenses while performing services as an employee.
- It is mandatory that you adequately account for these expenses to your employer, and it should be done within a reasonable period of time.
- In addition, you must return any excess reimbursement or allowance by keeping in mind a reasonable period of time.
Recording each trip used for business purposes that qualify for reimbursement is important. The mileage for each trip must be adequately accounted for. There are various tools available that are affordable and easy to use. One of the best examples of such an expense management tool is TripLog’s mileage app.
Finally, the IRS indicates that companies must offer a “reasonable period of time” to track, submit, and manage mileage expenses between an employer and employee. The IRS states these points on their website:
- You receive an advance within 30 days of the time you have an expense.
- You adequately account for your expenses within 60 days after they were paid or incurred.
- You return any excess reimbursement within 120 days after the expense was paid or incurred.
- You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.
Are There Any “Non-Accountable” Plans?
Any reimbursement method that does not meet the required three rules that are set forth by the IRS to not meet the requirements of an accountable plan. Some additional guidelines are provided by the IRS here to help you to explain how employers and employees should account for expenses that fall within the requirements of being reimbursable.
What Counts As a Reimbursable Expense?
Employees who use their own vehicles in order to conduct company business are entitled to reimbursement. Do you want to know what actions are qualified for reimbursement? Actions such as driving to meet prospects or close sales deals, managing company printing at the print shop, or other company-related activities usually qualify for reimbursement if an employee is using their own personal vehicle.
With that said, there are some activities, such as commuting to and from a normal work location, driving to and from lunch, or picking up a friend in the middle of the workday, that are not meant to be reimbursed by an employer to their employee. Thus, one must make use of a mileage logbook to keep accurate mileage records for business mileage expenses.
The Best Way To Track Mileage
Using a robust tool such as TripLog’s mileage and expense tracker is one of the easiest and most cost-efficient methods for tracking mileage expenses. Employers can also make use of various reimbursement plans via an intuitive dashboard. In addition, the app also provides 100% accurate mileage calculation and easy maintenance of mileage logs! Download the app for free today on iOS or Android.