There may be times when a company employee will use their personal vehicle to conduct business on behalf of their employer. There are a number of different ways an employee might conduct activity in this way, but it is important to understand when mileage reimbursement is warranted and when it is not allowed.
It’s important to know that the information contained in this section is specifically for employees; those who receive a paycheck from an organization as a full-time or part-time employment. While similar information is available in this information hub for business owners as well as those who are self-employed, this particular section is devoted specifically to employees.
Employees may have questions regarding whether they qualify for any reimbursement from their employer. Some of those questions might include:
- Am I entitled to mileage reimbursement if I drive a company car on behalf of the business?
- Will or should my employer reimburse me for mileage driven in my own vehicle for company business?
- How do I best track mileage when driving on company business?
- Should I report mileage expense each year for tax purposes?
- What qualifies as company-related mileage that is eligible for reimbursement?
I drive a car provided by my employer
If the vehicle you drive for work-related activities is owned and provided by your employer, you, are not eligible – nor required – to track and report mileage expense (outside of any tracking or reporting you or your employer might do strictly for internal purposes). If you pay for gas, parking, tolls or any other related expenses while in possession of the employer-owned vehicle, you may be reimbursed for those expenses, tax-free.
Your employer should explain to you the specifics regarding how they will reimburse you for expenses incurred while operating a vehicle owned by them. This is different and separate from mileage expense, which is for the purpose of drivers who own and operate a vehicle.
I drive a car owned or leased by me
If you are the owner (including a lease) of the vehicle you drive in order to conduct business for your employer, you are eligible to be reimbursed for expenses incurred while conducting business. Your employer may choose to handle reimbursement two different ways. The first might be reimbursing you for expenses incurred while using your vehicle for business. The second, and generally more acceptable way, is to track and report mileage expense. Mileage expense takes into account the overall costs associated with ownership of a vehicle.
If using the second method, mileage expense, then the IRS provides guidelines for mileage rate for business. Your employer should explain what the mileage rate to be used 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, an employer may choose to reimburse for general automobile expenses or may choose to reimburse based on mileage. There are other ways of ensuring employees are reimbursed for costs associated with using their vehicle for company-related activities.
An employer may also provide a mileage allowance. This type of allowance is usually paid to the employee in advance – such as the beginning of the month – in order to cover any transportation expenses the employee might incur. The challenge with this method of reimbursement is the increase in tracking all receipts, ensuring that the expenses align with the allowance and that any allowance overage is given back to the employer.
It’s also important for the employer and employee to keep in mind that if the allowance total given to the employee is higher than what the IRS standard mileage rate would have been, the overage must be report as income rather than reimbursement.
Although mileage reimbursement can be fairly straightforward, there are variations to this method that employers, and employees, must be aware of. The first, of course, is the standard mileage rate. The second is the Fixed and Variable Rate or FAVR.
Standard mileage rate
The standard mileage rate is the easiest and most straightforward way of tracking and reimbursing employees for use of their personal vehicles for employer-related activities. The IRS standard mileage rate addresses this specifically and is designed to make it very easy and straightforward for both the employer and employee.
It’s important to keep in mind that an employer is not required to use the IRS standard mileage rate and 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.
Fixed and Variable Rate (FAVR)
An employer may choose to use a combination of a variable mileage rate as well as a fixed cost to reimburse for other items:
- Variable rate: covers variable costs, such as gas, maintenance, oil changes, etc.)
- Fixed rate: covers 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 being reimbursed is tax-free, the employer must meet the requirements of an accountable plan. The rules of an accountable plan are determined by the IRS and include the following:
- Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
- You must adequately account to your employer for these expenses within a reasonable period of time.
- You must return any excess reimbursement or allowance within a reasonable period of time.
Each trip that qualifies to be included for reimbursement must be recorded and must be for a business purpose. The mileage for each trip must be adequately accounted for. There are available technology tools that are affordable and easy to use, such as the TripLog Mileage app. Finally, the IRS indicates that a “reasonable period of time” should be used to track, submit and manage mileage expenses between an employer and employee. That timeframe is 120 days. Specifically, the IRS states 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 set forth by the IRS to not meet the requirements of an accountable plan. The IRS provides some additional guidelines here to help explain how employers and employees should account for expenses that fall within the requirements of being reimbursable.
The best way to track mileage
While some employees who incur expenses keep track by using a variety of methods, the easiest, most cost-efficient method is to use a tool such as the TripLog Mileage app. This easy to use app is available for download onto a smart phone. It’s also easy for employers to use and manage their reimbursement plans via an intuitive dashboard.
What counts as a reimbursable expense?
Employees who drive their vehicles in order to conduct actual company business are entitled to reimbursement. Actions such as driving to meet prospects or close sales deals, managing company printing at the print shop and other company-related activities usually qualify for reimbursement if using a personal vehicle. Activities such as commuting to and from a normal or regular work location, driving to and from lunch or picking up a friend in the middle of the workday do not constitute reimbursable expenses.