Employers with staff who regularly travel and engage in company-related activities, where travel is conducted outside normal daily commutes, will likely reimburse their employees for travel expenses. There is no federal requirement indicating that employers must reimburse employees when using their personal vehicles to conduct company-business, but most companies will usually agree to do so. In addition, while there is no federal requirement, individual states may have reimbursement requirements that employers and business owners must follow. Employers should check with their individual states where employees reside to determine the requirements, if any, regarding mileage reimbursement.
For employers, it can be to your benefit to have a mileage reimbursement plan in place, as these business-related expenses are tax deductible and will help in reducing your overall tax exposure. In addition, having such a plan in place will make your company that much more attractive to prospective employees, especially if competing against another employer that does not offer expense reimbursement.
The IRS standard mileage rate
Each year, the IRS issues standard mileage rates. These rates represent the maximum mileage rate that employers can use in order to receive their full deduction. In addition, employees should know that any amount they receive up to this amount is exempt from taxation. Any amount they receive over this amount is subject to standard income tax.
Different ways for employers to reimburse for mileage expense
An employer may choose to reimburse their employees for general automobile expenses or may choose to reimburse based on mileage. There are other ways of ensuring employees are reimbursed for those costs associated with using their personal vehicle for company-related activities.
An employer may provide their employees with a mileage allowance. This type of allowance is usually paid to the employee in advance (such as the beginning of the month) to cover any transportation expenses the employee might incur. The biggest challenge in following this method of reimbursement is the need to track all receipts, ensuring that the expenses align with the allowance and that any allowance that is overpaid 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 is typically straightforward, there are variations to this method that employers, and employees, must be aware of. The first option is the standard mileage rate. The second option 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.)
Employers should have an accountable plan
To ensure the amount an employer gives to an employee properly covers a reimbursable mileage expense, 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 by the employee and be for a business purpose. There are available technology tools that are affordable and easy to use, including the TripLog Mileage app. 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:
- 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.
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 qualify individually. Records must be properly kept in order to meet the requirements of an accountable plan. To review the requirements set forth for employees, you may refer to Section 1 – Mileage Reimbursement: Employees for more information.
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.