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Are you providing mileage reimbursement to employees as a job benefit?
If so, there’s a lot to consider: from tax laws and IRS-compliance rules, to reimbursement costs and amounts, different vehicle programs and employee needs, and more, it’s no small feat to pull off a mileage reimbursement program that truly benefits everyone.
But mileage reimbursement doesn’t have to be a chore. We’re here to walk you through six things to know if you’re offering mileage reimbursement for employees, so you can make sure your vehicle program works for your company and your staff.
When it comes to federal laws and requirements for mileage reimbursements, there’s two main rules to keep in mind:
If your employee’s job description includes driving, vehicle and gas costs are considered a work-related expense. You can reimburse employees for these expenses via a number of methods, such as:
However, there is no federal law that requires employers to reimburse for mileage, so long as the expenses incurred from driving doesn’t cause your employee to earn less than minimum wage. If your company fails to reimburse employees for work-related expenses and it causes the employee’s net pay to drop below the federal minimum wage, your company can end up in hot water.
However, this has regulations around it. If you reimburse employees for mileage beyond the true expenses of work-related driving, this could be considered compensation and thus subject to taxes.
As a result, it’s important to carefully determine your reimbursement rates based on actual employee expenses. After all, you do want to adequately reimburse employees to cover work-related expenses, but without overcompensating them and creating tax waste.
For more details, read our full guide on employee mileage reimbursement rules. Remember: Everlance cannot provide legal advice for your company—this is for informational purposes only. If you have specific questions about your company’s legal obligations, we advise you to consult a legal professional.
How should you decide how much to reimburse employees for mileage?
Many businesses structure their reimbursement policies around the IRS standard mileage reimbursement rate. This provides a reasonable reimbursement for employees and ensures that both employees and employers do not have to pay taxes on this reimbursement.
The IRS standard reimbursement rate is not a requirement for businesses, simply a recommendation. If your business operates in a part of the country where costs are lower than average, you might consider lowering your rate.
On the other hand, if your business operates in a part of the country where gas and tolls are more expensive than average, you may want to consider reimbursing at a higher rate. However, if you do choose to reimburse employees at a rate that exceeds the IRS standard rate, the excess income (any amount above the IRS rate) is taxable for employees.
In short, it can be helpful to take a careful, data-driven look at an employee's actual expenses based on mileage driven, the costs in your area, and what out-of-pocket expenses—such as maintenance and insurance—employees are incurring. This will help you create a data-driven vehicle program that reimburses employees fairly while eliminating tax waste.
Of course, just because there’s no federal mileage reimbursement law doesn’t mean that individual states can’t say otherwise. As of 2022, only California, Massachusetts and Illinois require employers to reimburse for mileage. Here’s a breakdown of what’s required:
California Labor Code Section 2802 specifies that:
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If driving their person vehicle is required as part of their job duties, California employees must be reimbursed for all related expenses. These expenses include costs they incur both to own and operate their vehicle, such as:
Employers can choose any of several ways to reimburse employees for these methods, including (1) increased compensation (taxable), (2) a flat allowance (may or may not be taxable depending on the level of documentation), (3) a mileage reimbursement program like CPM or FAVR (typically all or mostly tax-free), or (4) actual expenses (tax-free).
Most companies choose to use a mileage reimbursement program for the tax benefits and relative ease compared to the actual-expense method. But keep in mind that regardless of method, the reimbursement must fully cover an employee’s actual expenses.
That means even if you reimburse at the IRS mileage rate, if an employee can show their total expenses were greater, you are still on the hook for paying them the difference. The standard mileage rate is based on a national average of costs, and given California has some of the highest gas prices in the country, it’s possible that could be the case.
Similarly, a monthly car allowance could be problematic, especially if employees aren’t required to submit mileage logs. Then the stipend becomes taxable, lowering the employee’s actual take-home amount and increasing the likelihood that it isn’t enough to cover their actual expenses.
A FAVR program, which reimburses employees with a fixed allowance and a per-mile rate, both of which are based on costs in their zip code, often ends up being the best option.
Effective since 2019, all Illinois employers must reimburse employees for all work-related expenses, including mileage and/or vehicle costs.
Employees in Illinois should be reimbursed at the IRS standard mileage rate, or the rate of their actual expenses, if higher than the IRS mileage rate accounts for.
Employers in Illinois that provide a flat-rate allowance or stipend for employees must ensure that the stipend covers employees actual costs and avoid accidentally under-reimbursing employees. As a result, it’s recommended for employers in Illinois to use a data-driven program, such as FAVR, or have employees keep careful records of all vehicle-related expenses.
A mileage tracking app like Everlance is an easy way to track employee mileage accurately and ensure that employees are neither being over- or under-reimbursed, keeping your company’s reimbursements tax-free and in line with current requirements.
Employers in Massachusetts are required to provide employees with “compensation for all travel time and shall be reimbursed for all transportation expenses.” For employees that are tasked with driving from one location to another during the course of their workday or shift, Massachusetts law requires that they are compensated for their time as well as their mileage or vehicle expenses. The standard IRS rate is recognized as a fair amount for reimbursement.
Of course, if you’re providing mileage reimbursement as a perk for employees, the legal requirements are only one piece of the puzzle.
The Great Resignation has exacerbated the labor shortage, which means that providing a work environment and benefits that help employees feel valued and supported are more important than ever. As of June 2022, there were 11.4 million job openings in the US and only 6 million unemployed workers—which means lots of jobs unfilled with no workers to fill them.
How can you make sure that your vehicle program is a real benefit for employees that improves retention? Transparent, flexible, data-driven vehicle programs stand out among both new and existing employees because, in this case, the benefits are:
In addition, providing an easy-to-use app for tracking mileage helps make mileage reimbursement a true perk by minimizing the work employees need to do to receive the benefit. If they have to spend a lot of time documenting and submitting their mileage, it starts to feel less and less like a perk.
While a transparent, data-driven program is a great way to make it a good benefit for employees, it’s important to consider the right type of vehicle program for different roles at your company. As with other forms of compensation and benefits, one size does not fit all.
When designing your vehicle program, you should ensure that the benefits match the worker’s roles, expenses and location.
For example, it might make sense for seasonal workers to receive a smaller benefit or more flexible benefits due to the high turnover within those roles. For roles like these, a mileage reimbursement program such as CPM—which is easy to on- and off-board employees quickly, provides quick reimbursement turnaround and is simple to execute—is probably your best option.
On the other hand, for employees like sales reps, who are much more important to retain long-term for your company, might require a more detailed, data-driven approach. For fair reimbursements for the employee without over-spending, data-driven programs like FAVR are the best option. FAVR programs take into account employee location, actual costs in that area, type of car driven, mileage driven, insurance costs and more to create a fair fixed and mileage-based reimbursement each month that adjusts based on fluctuations in costs.
Company car programs or car allowances might be a better option for senior-level employees or extremely high mileage drivers for whom you want to provide a higher benefit or reduce the need for reimbursements. For high-mileage employees, company cars or allowances can provide more budget control, as CPM programs often over-reimburse high mileage drivers.
Finally, if mileage reimbursement is a job benefit for your employees, it’s important for both you and your employees to keep the program flexible.
As discussed above, a flexible program not only helps provide a real benefit for employees, but it also helps you ensure that your employees are not being over-compensated, thus ensuring your program stays tax-free and reducing company costs.
Some flexible vehicle programs, such as FAVR programs, provide a flat-rate monthly “allowance” based on fixed costs, such as insurance and depreciation, while also providing a reduced reimbursement based on mileage. Programs like this help your company adapt to fluctuating costs and changing priorities by reducing reimbursements when costs are lower. In addition, when costs are higher, you can make sure you’re not shortchanging employees either.
In short, there are a lot of layers to consider if you’re considering mileage reimbursement as a job benefit.
From flexibility and data-driven programs to ensuring you understand both state and federal requirements for mileage reimbursement, plus having employees in different roles and situations, Everlance is here to make sure your mileage reimbursement program stays IRS-compliant, tax-free and beneficial for you and your employees.
Ready to learn more about how Everlance can simplify your mileage reimbursement benefits? Schedule a 15-minute consultation call today.
We help people save time and money. At Everlance, we're on a mission to empower mobile workers and businesses. That sometimes leads us to generalize tax information. Everlance team members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.
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