If your employees use their personal vehicles for work-related tasks, you may be required to reimburse them for their mileage. Let’s look at six frequently asked questions about mileage reimbursement.
[Read more: Should You Give Employees a Company Car?]
What is mileage reimbursement?
Mileage reimbursement involves compensating your employees for any business-related driving they do. It’s often done when employees use their personal vehicles to travel and run business-related errands.
That means employees will receive a certain amount of compensation for every mile they drive for the business. You could choose to give your employees a monthly mileage allowance, but using the IRS’s standard rate is usually more straightforward. Just make sure that your employees understand how the reimbursement is calculated.
What is considered work-related mileage?
According to the IRS, business mileage is any mileage driven between two places of work. That means you can reimburse your employees for work-related trips outside of their regular commute. This includes the following activities:
- Business trips.
- Meetings with clients and prospective clients.
- Running errands for the business.
- Making deliveries for the business.
Am I required to reimburse my employees?
No federal law requires you to reimburse your employees for using their personal vehicles for work, but some state laws do. California, Illinois, and Massachusetts require companies to reimburse their employees for business-related mileage and expenses.
You should check the laws in your state and consult with an attorney to determine whether you’re required to provide mileage reimbursement. Even if it isn’t a requirement, it may be a good idea if your employees do a lot of work-related driving.
No federal law requires you to reimburse your employees for using their personal vehicles for work, but some state laws do.
How is mileage reimbursement calculated?
The IRS sets a standard mileage reimbursement rate of 58.5 cents per business mile driven in 2022. This rate is based on an annual study of the fixed and variable costs of operating a vehicle, like gas, insurance, depreciation, and standard maintenance.
You’re not required to reimburse employees using the IRS’s mileage reimbursement rate — you can choose a higher or lower amount if you prefer. But if you reimburse your employees at a higher rate, the additional amount is considered gross wages and is subject to payroll taxes.
Are mileage reimbursements tax-deductible?
Yes, reimbursements based on the federal mileage rate are tax-deductible. And since they aren’t considered income, they’re non-taxable for your employees. But if you provide more than the federal mileage rate, the difference is regarded as taxable income.
[Read more: 10 Tax Deductions Your Business Should Know About]
How do I come up with an employee mileage reimbursement policy?
Here are the biggest things you need to think about when setting up a mileage reimbursement policy:
- Consider the location: Vehicle and fuel costs can vary significantly depending on where you live. A San Francisco-based tech company will pay a different rate than a small business located in Ohio. You should choose a rate that is fair based on your location.
- Find a tracking solution: Your employees need a way to track their mileage so that they can be reimbursed. Fortunately, there are apps that will track your mileage for you so you can avoid manual logging. Using an app also ensures your employees don’t overreport their mileage.
- Create a written policy: You also need to have a written document that outlines your mileage reimbursement policy. For instance, you should clearly identify what constitutes a business trip and what doesn’t.
- Provide examples: Using specific examples will make your policy easier for employees to understand.
- Create a mileage reimbursement form: Finally, creating a standard mileage reimbursement form that employees can fill out each month is helpful. This form ensures you have the information you need come tax season.
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