Tips for building a company mileage reimbursement program & how to calculate reimbursement rates for your employees mileage & expenses
Company Mileage reimbursement programs can be great for your business and your employees, but many small business owners aren’t clear on the specifics of designing and implementing a program.
While it’s actually a surprisingly simple process, there are some things you should know going into designing a company mileage reimbursement program for your business. Here, we’ll discuss some things to consider as you plan and implement your employee mileage reimbursement program so you are not making the same mistakes many companies make initially.
What Are the 2019 Mileage Reimbursement Rates?
The IRS sets a standard mileage reimbursement rate each year so that employees, contractors, and employers can use them for tax purposes. This rate fluctuates year to year and applies to cars, trucks, and vans.
The IRS sets this rate for two reasons:
- To provide employers a fair rate for compensating their employees when they drive their own personal vehicles for work-related purposes.
- To give employees a rate which they can use to deduct mileage on their income tax return, only if their employer doesn’t reimburse for this expense, or doesn’t reimburse the full amount.
The 2019 IRS Standard Reimbursement Rates are:
- 58 cents per mile for business miles driven (up from 54.5 cents in 2018)
- 20 cents per mile driven for medical or moving purposes (up from 18 cents in 2018)
- 14 cents per mile driven in service to a charitable organization (currently fixed by Congress)
Most businesses structure their reimbursement policies around the IRS standard business mileage deduction of 58 cents. Does this mean that you should use this exact rate as well? Not necessarily, but we’ll discuss more about how to make that decision below.
Learn about the 2020 Mileage Reimbursement Rates
Do I Need to Use the Standard Company Mileage Reimbursement Rate?
The short answer is, most companies do, and it may be a good fit for your business. That said, the federal standard mileage rate is merely a recommendation.
If you conduct business in a part of the country where gas and tolls are more expensive, you might want to increase your rate. However, if you choose to use a rate that exceeds the federal rate, the excess income would be taxable for the employee (something to keep in mind when selecting a rate).
Alternatively, if you’re operating in an area that’s less costly, you might consider lowering your rate. The standard mileage rate is based on shifting national averages, and may or may not fit all areas of the country.
Even if you choose not to reimburse your team at all, they may be able to get money back by deducting their mileage expenses from their gross income. We’ll talk more about how this works in practical terms in a moment, but employee mileage is tax deductible whether or not you have a reimbursement program in place.
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 — they don’t have to worry about reporting taxable income resulting from reimbursement in excess of the standard mileage rate.
If you’re paying your team back for the miles they drive, you can use expense tracking software to pay your employees at the rate you choose, whether it be every two weeks, once a month, or once every few months.
Whatever you decide, set a rate, have you 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.
Remember, if you don’t reimburse for business mileage, employees can deduct the cost of driving for work from their gross income on their taxes.
Reasons to Reimburse for Car Mileage
Depending on the state your business is located, whether or not you pay your staff back for business mileage may not even be a question – it may be your state’s law. Both California and Massachusetts both have laws that say businesses must pay their employees for work expenses such as business mileage. Therefore, it’s best to check your own state’s labor laws to see if it’s a requirement.
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. Employees who use their personal cars for work will appreciate not having to dig into their own pockets for the costly expenses that come along with it, such as gas, repairs, and insurance.
If you have employees who are paid minimum wage, or close to it, and use their own car for business reasons, here’s something else to consider. If their travel expenses decrease their earnings below the applicable minimum wage, their employer is responsible for making up the difference. However, if this employee is getting reimbursed for their business mileage, then this would not be a concern.
As a business owner, all reimbursements paid to your employees for business mileage is a tax-deductible expense for the business itself. Therefore, there is not much to lose by paying your employees back for this expense, and you have plenty to gain – most importantly, employee satisfaction and retention.
Tax Basics for Company Mileage Reimbursement
In order to discuss the tax basics of a company mileage reimbursement program, we’ll need to talk a little bit about how mileage tax deductions work. Employees track their mileage to and from work obligations (while documenting the purposes of the trips) or any of the other tax-deductible destinations we mentioned earlier.
Employees then use the IRS rates (or the actual costs of using their own vehicles) to calculate the amount of money that is deductible from their gross income. While your team can document their mileage using a plain old spreadsheet, there are a number of excellent mileage tracking apps available that automate mileage logging, saving your team time while saving you money.
Here’s where the catch comes in for your employees. Your employees can’t use the business standard mileage rate if they’ve already claimed a Section 179 deduction for the same vehicle they use for work.
Additionally, employees may not use the business mileage rate for five or more vehicles simultaneously. Also, though it should be understood, employees can’t deduct their commute, as nice as that would be. If you’re looking to minimize your team’s commuting stress, consider offering commuter benefits.
We should also discuss the FLSA kickback rule, which is a narrow exception concerning company mileage reimbursements that companies need to adhere to if their employees are earning near or at the minimum wage.
This law is called the kickback rule because it regulates money “kicked back” to the company through under-reimbursed mileage expenses. If the value of those “kickbacks” pushes the employee’s salary below the minimum wage, a wage and hour issue arises.
Should You Use the Standard Mileage Rate or a Lower/Higher Rate?
As the IRS rate is based on average gas prices, ordinary vehicle wear and tear, and the average costs associated with repairs, they are just that – averages. Obviously, all of these costs vary in different parts of the country. Therefore, a company based in New York or California may consider offering a higher mileage compensation rate, then a business located in the South or Midwest. However, if your business uses a rate that exceeds the federal standard, the excess received by the employee would be considered wages that they’ll need to pay taxes on. On the opposite end, if your business uses a lower rate than the standard one, then your employees can deduct the rest on their income tax return.
Whether your company decides to take the standard rate route, or take the road of going higher or lower, you are still following the small business best practice of reimbursing your staff for business mileage, and therefore, keeping your employees happy.
How to Reimburse Employees for Company Mileage?
For employees to get reimbursed for business mileage, they first need to track their miles and keep accurate reports on the distance driven. This is where Everlance, the #1 business mileage tracker app, can help. Sure, your staff can keep a manual log every time they get in their car to drive for work-related purposes, then fill out an expense form when they return to the office, and submit accordingly. But a mileage tracking app, such as Everlance, handles all of this for them, saving a ton of time and hassle.
Once Everlance is downloaded onto your staff’s smartphones, they’ll just swipe left or right to categorize the trip as business or personal, then the app will automatically track mileage, keep a record of it and calculate the deduction. Then employees can submit compliant reports to their employer for reimbursement.
Your employees can also use Everlance to track all their business expenses, not just mileage. From parking fees and tolls, and all other costs, they can enter each one into the app manually, or digitally by capturing the receipt with a photo.
Being able to streamline employee expense reporting and reimbursements is more efficient when expenses are recorded digitally in real time. As employees enter their mileage and other expenses into the system, it can be integrated with the company’s payroll system so employees can receive their reimbursements quickly in their next paycheck, as a separate check, or direct deposit into their bank account.
Everlance is 100% IRS-compliant, so if your staff is using Everlance Teams to track their mileage and other expenses, you can have peace-of-mind that expense records are being kept safe, organized, and accurate, eliminating room for error and mistakes.
Conclusion About Company Mileage Reimbursement
Company Mileage reimbursement law isn’t terribly complicated, but it is important to know the impact on your business and your employees before implementing a program. Be sure that your employees are keeping standardized mileage records and that you have certain standards in place to avoid reimbursing on false pretenses. If you are looking for a mileage tracking and reimbursement solution, setup a time with our team for a demo and see how much time your team can save this year!
Now that you have the full roadmap on company mileage reimbursement, you can keep your business moving along in the direction of employee satisfaction and other business best practices.