Designing, implementing and managing a mileage reimbursement program for your company can be difficult, and many business owners make the same initial mistakes.
Relying on manual mileage and expenses tracking, for example. Or settling on a tool that doesn’t provide enough accountability or meet your company’s needs. Or not understanding mileage reimbursement rules at the start of the program.
So, how can you avoid making these common mistakes with your company mileage reimbursement program?
First, you’ll need to understand what the mileage reimbursement rules are.
Then, you can dive into the benefits of offering an employee mileage reimbursement program, how to calculate mileage reimbursement rates for employees and more.
We’ll walk you through, step-by-step. Keep reading or jump to the relevant section:
What is mileage reimbursement?
First, what is mileage reimbursement?
Mileage reimbursement is a compensation employers may offer employees to offset the expenses associated with driving for the business. This is most often the case when employees drive their personal vehicles for business purposes, as opposed to having a company car.
In most cases, mileage reimbursement is not required by law, except in certain states.
Mileage reimbursement is intended to cover a variety of expenses associated with owning and driving a car, such as:
- Fuel costs
- Vehicle maintenance
- Vehicle depreciation
- Insurance costs
There are a variety of ways to manage a mileage reimbursement program, from using a set per-mile rate such as a CPM (cents-per-mile) program, an overall vehicle allowance or flat monthly rate, or a FAVR (fixed-and-variable-rate) program.
However, it’s important to understand the IRS mileage reimbursement rules and legal obligations for your company before designing and implementing a mileage reimbursement program for your employees.
What are the rules for mileage reimbursement for companies?
When it comes to mileage reimbursement rules, the rules are pretty simple. Companies are not required to reimburse employees for mileage (in most cases), however, it is best practice to do so for a number of reasons, which we’ll get into below.
However, there are two legal considerations to keep in mind when considering your company mileage reimbursement policy: employment laws and tax laws.
Employment laws around mileage reimbursement
While mileage reimbursement is not required federally, all companies are required to reimburse employees for work-related expenses.
If your company fails to reimburse employees for work-related expenses to the point that it causes the employee’s net pay to drop below the federal minimum wage, your company could end up in hot water.
Tax laws around mileage reimbursement
Secondly, there are tax laws to keep in mind as well. Mileage reimbursement is considered tax-free income to both the employee and the employer. However, if you reimburse employees for mileage beyond the true expenses of work-related driving, this could be considered compensation and thus be subject to taxes.
As a result, when determining the rates of employee mileage reimbursement at your company, it’s important to provide adequate reimbursement to employees to cover work-related expenses without overcompensating them and incurring taxable expenses.
How should you decide how much to reimburse employees for mileage? We’ll discuss this below.
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.
IRS mileage reimbursement rates 2022
Each year, the IRS sets a standard mileage reimbursement rate so that employees, contractors and employers can determine mileage reimbursement and expenses for tax purposes.
This rate fluctuates from year to year and applies to cars, trucks and vans.
The IRS sets this rate for two reasons:
- To provide employers with a fair rate for compensating employees when they drive personal vehicles for work-related purposes.
- To give employees a rate which they can use to deduct mileage on their income tax return if the employer doesn’t reimburse for the expense
This year, the IRS updated the reimbursement rates mid-year to reflect the rapidly-changing fuel and vehicle costs. As a result, there are two sets of IRS standard reimbursement rates for 2022.
The IRS Standard Reimbursement Rates for Jan 1, 2022 - Jun 30, 2022 are:
- 58.5 cents per mile for business miles driven
- 18 cents per mile for medical or moving purposes
- 14 cents per mile driven in service to a charitable organization
The IRS Standard Reimbursement Rates for Jul 1, 2022 - Dec 31, 2022 are:
- 62.5 cents per mile for business miles driven
- 22 cents per mile for medical or moving purposes
- 14 cents per mile driven in service to a charitable organization
Many businesses structure their reimbursement policies around the IRS standard mileage reimbursement rate of 62.5 cents per mile. This provides a reasonable reimbursement for employees and ensures that both employees and employers do not have to pay taxes on this reimbursement.
Does this mean you should use this exact rate as well? Not necessarily, but we’ll discuss how to make that decision below.
Do I need to use the standard IRS mileage reimbursement rate?
The short answer is, most companies do, and it may be a good fit for your business as well. However, the IRS standard mileage reimbursement rate is simply a recommendation.
If your business operates in a part of the country where gas and tolls are more expensive, you may want to increase your rate. However, keep in mind that if you choose to use a rate that exceeds the IRS standard rate, the excess income would be taxable for the employee.
Alternatively, if your business operates in an area of the country that’s less costly than average, you might consider lowering your rate.
Do I need to update my company's mileage reimbursement rate to match the new IRS rate?
In short, no, but it may be a good idea to do so. While the IRS standard reimbursement rate is used by most companies as a baseline reimbursement rate, it is not a mandatory rate.
Keep in mind, as well, that reimbursing employees for mileage for any amount up to the IRS standard rate is tax-free for both you and your employees. That means if you were previously reimbursing employees at the 58.5 cents per mile rate, you can know reimburse them up to 62.5 cents per mile, tax-free. Since any amount above the standard rate is taxable for the employee, the IRS standard rate increase is a great way to boost benefits for employees without increasing taxable income.
With rising gas prices and increased costs of car maintenance, updating your reimbursement rate to match the new IRS rates is a great benefit to attract and retain employees.
If you're interested in having more control over your reimbursement spend, reducing overall risk exposure through your vehicle program and making sure employees get reimbursed fairly based on variable costs, consider looking into a FAVR program for your vehicle program. Everlance can help you see if a FAVR program is right for your company and guide you through implementing a FAVR program easily and hassle-free.
How does the new IRS reimbursement rate affect my vehicle program?
While a mid-year update to the standard IRS rate may feel surprising and confusing, the truth is that it doesn't have to throw your program—or your budget—for a loop.
The IRS cited "increasing fuel costs" and a "number of unusual factors" in their decision to update the standard reimbursement rate for the remainder of the year. So what does that mean for you?
If you have a car allowance: this won't affect your vehicle program, although you may want to follow the lead of the IRS in increasing allowances slightly for employees to compensate for the increasing gas prices and other costs that come with maintaining a vehicle.
If you have a CPM program: this change increases the amount of tax-free reimbursement you can provide to employees. Many companies prefer to reimburse at the standard IRS reimbursement rate to ensure employees are getting a fair reimbursement. Since any reimbursement amount up to the standard rate is tax-free, you can now reimburse employees at a higher rate without increasing taxable income.
If you have a FAVR program: with a FAVR program, reimbursement rates are calculated based on both fixed and variable costs, and typically are updated on a monthly basis. As a result, your program will stay consistent with what fixed and variable rates are already determined for your program.
Benefits of offering a mileage reimbursement policy
As a business owner, you may be wondering why bother reimbursing employees for mileage if it’s not required by law.
Well, there’s more than a few reasons.
For one, several states—including California, Illinois and Massachusetts—require businesses to pay employees for work-related mileage. It’s important to check your state’s labor laws before making any decisions about a company mileage reimbursement program to ensure you’re following state guidelines.
However, even if your state doesn’t require it, it’s still a good idea to implement company mileage reimbursement as part of your business policy. Why?
- An employee mileage reimbursement program can improve employee satisfaction and retention.
- Improve employee happiness and morale and attract high-quality candidates.
- Implementing a mileage reimbursement program is often more cost-effective than maintaining company cars or a company fleet.
- Reimbursements to employees for business mileage is tax-deductible for your company.
In short: there’s a lot of good reasons to implement an employee mileage reimbursement program, and hardly any reason not to.
Employees who use their personal vehicles for work will appreciate not having to dig into their own pockets for the costly expenses that come with it. As a result, having an employee mileage reimbursement program in place can improve employee satisfaction and retention.
Also keep in mind that if your employees are paid minimum wage, or close to it, and use their own car for business purposes, their travel expenses may decrease their earnings below the minimum wage. In this case, the employer is federally required to make up the difference.
How to Calculate Mileage Reimbursement for Employees
In short, there’s two ways to calculate mileage reimbursement for employees: manually or digitally.
Either way requires employees to track their mileage. It’s essential that employees who wish to be reimbursed for mileage track their mileage carefully and keep accurate records of the distances driven for business purposes.
Manual Mileage Reimbursement
This can be done manually, with a manual log that employees fill out each time they drive their car for work-related purposes, by recording their odometer readings at the end of each trip and/or mapping their mileage on Google Maps. Employees can then submit their mileage log to administrative staff who can calculate the amount owed based on the set reimbursement rate.
However, this can be a tedious task, and many employees may end up estimating their mileage at the end of the day rather than tracking mileage as they go, over- or under-estimate their mileage or simply forget to track their mileage altogether.
Digital Mileage Reimbursement
As a result, it’s a much better idea to use a digital solution, like Everlance’s mileage tracker app, to ensure mileage is tracked automatically and accurately. Not only does it save your employees the time and hassle by automatically recording their mileage, but it also ensures accuracy, allowing your company to fairly reimburse employees without overpaying.
In addition, manual logs create a lot of paperwork for administrative staff or payroll employees, who then have to check mileage logs and expense reports and process them manually. With Everlance, your employee’s mileage is tracked automatically. Then employees can easily submit IRS-compliant reports to their employer for reimbursement.
Everlance is 100% IRS-compliant, so if your staff is using Everlance Business to track their mileage and other expenses, you can also have peace of mind that expense records are being kept safe, organized, and accurate, eliminating room for error and mistakes.
FAQs about employee mileage reimbursement
When should an employee be reimbursed for mileage?
Employers are not required to reimburse employees for mileage unless the mileage expenses cause their wages to drop below the federal minimum wage. However, many businesses reimburse employees for business mileage at the IRS standard rate as part of work-related expenses.
How do you reimburse mileage to employees?
At the federal level, there are not many hard-and-fast mileage reimbursement rules for employers. When reimbursing employees for mileage, you can use mileage tracking software to pay your employees at the rate you choose, whether that be the IRS standard rate or another rate. Payment can be made to employees every two weeks, once a month or once every few months.
Whatever you decide, set a rate, have your employees enter their mileage, and then use that mileage to calculate how much to reimburse them. You can reimburse them through your existing payroll software, or through another method if you prefer.
Do employers have to reimburse mileage?
Businesses are not federally required to reimburse employees for business mileage. However, for businesses and employees in California, Illinois and Massachusetts, there are state laws that require employers to reimburse employees for mileage.
How much does the average company reimburse their employees for mileage?
While some companies choose to adapt the rate at which they reimburse their employees according to driving costs in their area, most businesses choose to use the standard mileage rate established by the IRS.
The standard mileage rate not only makes things simple for your business, but your employees as well. WIth the standard rate, they don’t have to worry about reporting taxable income resulting from excess reimbursement.
If you don’t reimburse for business mileage, employees can deduct the cost of driving for work from their gross income on their taxes.
Is a commute reimbursable for mileage?
No, a standard commute from an employee’s home to a company office and back is not considered business mileage and therefore not reimbursable.
However, if part of this trip is for a business purpose, that portion of the trip can be reimbursed. For example, if an employee leaves the office, drives to meet a client on his way home, and then continues on from the client meeting to his home, the portion of the trip from the office to the client meeting location is considered business mileage.
Have more questions?
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