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Mileage Tracking

A Guide to Employee Mileage Reimbursement

Timeero
October 19, 2021

How to Reimburse Your Teams for Mileage Properly?

Certain jobs require employees to use their personal vehicles for work-related purposes. If your business requires employees to use their private cars for business purposes, it’s a good idea to design a company mileage reimbursement policy. 


When it comes to the legal framework regarding this issue, there are no federal laws that require employers to reimburse their teams’ transportation expenses. On the other hand, employee mileage reimbursement is a requirement in certain countries. 


So, to be sure what’s expected of you as an employer, the best way to go is to check the legislation in the state you’re operating in with your legal advisor or accountant.  


This article is designed to help you get a better understanding of mileage reimbursement rules, regulations and rates, so you can make an informed decision when reimbursing your field teams for mileage.

What Is Mileage Reimbursement?

Mileage reimbursement is a form of compensation for the mileage costs associated with the use of employees’ personal vehicles for work purposes. This refund doesn’t apply to regular commutes to and from work. 


Refunding your employees mileage costs is required by the law in certain states. For example, reimbursement laws of California and Illinois are the most stringent.

These laws require employers to reimburse their teams for necessary business expenses, including mileage compensation.

What Constitutes Work-Related Mileage?

Prior to developing your employee mileage reimbursement program, it is important to list all forms of travel your employees will be reimbursed for. Make sure to include them in your travel policy.


This way, your mobile workers will understand which forms of travel are reimbursed, and at what rates. 


So, before diving deeper into mileage reimbursement rules for employers, let us first cover some of the most common forms of travel in mileage reimbursement policy:

  1. Performing business-related transactions in banks
  2. Meetings or visits with clients and customers
  3. Providing at-home services, like home healthcare services
  4. Transporting clients to a destination 
  5. Travel to a temporary job site
  6. Purchasing supplies
  7. Travel to a business convention or conference
  8. All other work-related errands.

Answering the age-old question “how much should you pay your employees” is never easy, as business owners need to minimize costs and maximize their revenue. But, there is another aspect of employee mileage reimbursement that needs to be taken into account. 


It can be seen as an investment, rather than an expense. We’ll go more in-depth with this aspect of employee compensation later.

IRS Mileage Reimbursement Rules

To get a better understanding of how to calculate mileage reimbursement, let us first address the IRS mileage reimbursement rules. The IRS issues a new optional standard mileage rate every year.


This rate, also known as the deductible mileage, fluctuates year to year and it is only an estimate. When determining the standard mileage rate, the IRS takes into account the variable costs of operating a vehicle, including fuel, repair, maintenance, depreciation, and insurance. 


It’s a base reimbursement rate employers can use to determine the cost of reimbursement that applies to cars, trucks, and vans. Although the Division of Labor Standards Enforcement (DLSE) considers it to be reasonable, you can go with less or more for your field staff. 

IRS Standard Mileage Rates for 2021

In December last year, the IRS issued the 2021 optional standard mileage rates. According to this announcement, the standard IRS mileage rates for 2021 are:

  1.  56 cents per mile for business miles driven
  2. 16 cents per mile for medical and moving purposes 
  3. 14 cents per mile in service for charity organizations


It is important to note that there are two exceptions to this rule. In the first year the car is available for business use, the standard mileage rate must be used. In later years, employers can opt for the actual cost if they want to.

When it comes to leased vehicles, if standard mileage rates are chosen, they must be applied for the entire lease period.  


The standard mileage rates for 2022 are yet to be announced by the IRS by the end of the year.

Until then, read our article IRS Mileage Rates for 2022: What Can Businesses Expect For The Upcoming Year and learn how mileage rates affect your business.

Are Mileage Reimbursements Tax Deductible?

Implementing a mileage compensation policy is beneficial for the businesses as mileage reimbursements are tax deductible. In other words, your organization can write them off as business expenses. In addition to this, having a mileage reimbursement policy in place is also helpful for your mobile workforce.


In fact, mileage reimbursement through their employer is the only way for them to get refunds for using their vehicles for work.


Still, employees need to stay mindful of the fact that a mileage reimbursement  rate that exceeds the standard federal rate is taxable. This is due to the fact that it is considered to be an excess income.

How Do You Reimburse Mileage Properly?

Companies need to record their employees’ business mileage properly in order to provide them with tax-free compensation. These mileage logs need to be accurate and compliant with IRS rules. What does this exactly mean?


For starters, the mileage logs need to be accurate and consistent. Also, they need to contain the following data: the starting point and the destination, the starting and ending time, the purpose and the date of the trip, as well as the mileage at the beginning and at the end of the trip. 


The same applies for every single trip your field employees undertake. 


With the advancement of technology, paper forms, spreadsheets and other outdated methods are getting replaced with more accurate, more efficient, and modern systems like GPS-tracking apps


Smart software solutions have become an irreplaceable ally in tracking speed, distance, and the exact time for each location. Therefore, they are invaluable in implementing a well-organized and simple system for handling employee mileage reimbursements. 

Should I Use the Standard IRS Mileage Rate?

Using the standard IRS mileage rate for your own employee mileage reimbursement program is merely a recommendation. In other words, employers aren’t required to use it. Instead, they can use their  own rate for mileage reimbursement, and it can be higher or lower than the one set by the IRS. 


For instance, they can calculate the actual expenses of using their vehicle.


Running a business in different parts of the country can come with different costs. So, if your organization operates in an area with higher expenses (like gas and tolls), increasing your rate is a logical step. 


The same goes for conducting a business in a region that is less expensive - employers are free to consider lowering their employee mileage reimbursement rates. 


As mentioned above, when deciding on a rate, it is important to be aware of the additional fees that a higher rate can incur. A rate that exceeds the standard federal rate is treated as an excess income that is taxable for the employee. 


And on the other hand, opting for the federal standard mileage rate can be a good fit for your business.

How Much Do Companies Typically Reimburse Their Teams for Mileage? 

If you’re wondering what is a reasonable mileage reimbursement rate, you’re not alone. When developing a compensation policy, many business owners are uncertain as to how much to reimburse for mileage.


So, how much do companies reimburse for mileage on average? Most companies consider the standard IRS rate and design their policies around the IRS established 56 cents per mile for business miles driven. 


This approach comes with a benefit for the employees as they don’t have to report taxable income, as they would if the rates exceed the federal standard. 


Of course, as already mentioned, this doesn’t necessarily mean that you have to adopt the same approach. There are more ways to structure a fair employee mileage reimbursement program, as will be discussed below.

How to Calculate Mileage Reimbursement?

Businesses are at liberty to adapt their mileage reimbursement rates, and take driving costs in their area into account when structuring their compensation packages. If you want to keep things simple, you can go with the mileage rate established by the IRS annually


Companies that are looking for alternatives to the standard rate have a couple of other solutions to choose from. 

FAVR (Fixed and Variable Rate Allowance)

Under this approach to reimbursing employees, employer is required to pay a combination of mileage reimbursement payments and a monthly allowance:

  1. A fixed amount that covers fixed costs associated with owning and driving a vehicle, such as insurance, registration fees, or lease
  2. A cents-per-mile rate includes variable expenses like gas, tires, and maintenance

Again, if the amount exceeds the standard rate, it will be taxed.  

Actual Expenses Method 

This method comes down to adding up the money that was actually spent in the operation of the employee’s vehicle. This figure is then multiplied by the percentage of the vehicle’s use for work purposes. 


For example, if half of miles your mobile workers drive are for business, total vehicle expenses are multiplied by 50%. 


Typical costs that are included in the Actual Expenses Method are gasoline, insurance, maintenance, lease payments, tires, and depreciation. 


Another important thing for business owners to keep in mind is that calculating employee mileage reimbursements is much easier with the help of smart software solutions like Timeero


We’ll address automated mileage tracking and its role in streamlining mileage reimbursement in the next section.


It’s also good to know that employee mileage is tax deductible even without a reimbursement program in place. 

How Do I Reimburse My Team Fairly and Accurately?

As the decision-makers, employers have to determine how they want to provide reimbursements for their field teams. Considering your industry’s best practices for mileage reimbursement as well as IRS mileage reimbursement rules for employers will help you develop a fair compensation program for your mobile team. 

Automate Mileage Tracking

The easiest way for employers with mobile teams is to follow the IRS mileage reimbursement rules for employers and go with the standard mileage rate this institution has set. To make things even simpler and more accurate, opt for a mileage tracking app that integrates with payroll software. 


The traditional approach with spreadsheets is time-consuming and error-prone. With a mileage tracking software your mobile employees won’t have to log their miles manually anymore, and you don’t have to rely on employee trust. 


It’s a win-win situation as inflation of mileage is eliminated on one hand, while on the other your workers get fair compensation for travel expenses. 

Benefits of Offering Employee Mileage Reimbursement Policy

Managing to attract and retain top talent, and keep your employees engaged and productive is essential in running a successful company. Compensating your workforce fairly is a vital step in achieving this goal.  


On that note, having a reimbursement program in place comes with certain benefits that go beyond being compliant with federal and local laws. 

  1. Happier Employees and a More Positive Work Environment

Paying your staff fairly is important in keeping them happy and making them feel they are valued and appreciated as professionals and human beings. Compensating your mobile workers reasonably creates a more positive work environment, an ideal setting for boosting productivity and efficiency in your workforce.

  1. Employee Retention

Mileage reimbursement programs can also contribute to employee retention. Remember, exceptional workers can choose where they want to work, so compensating your employees properly is a step towards keeping them within your organisation.

  1. Attracting Highly Skilled Candidates 

In addition to keeping your current employees satisfied, it can also contribute to establishing a positive brand reputation and attracting new, highly qualified candidates. Offering a fair mileage reimbursement program in addition to a decent salary and positive work environment can help in becoming a top choice for the best performers.

And with a dedicated, highly-skilled workforce, businesses can expect remarkable results. 

  1. Paying Less in Taxes

And when implemented correctly, employee mileage reimbursements are tax-free for the employer. As long as you don’t compensate your employees for travel expenses over the standard mileage rate, reimbursements are fully deductible business expenses. In other words, they help businesses pay less in taxes. 


Let us examine the benefits of such policies in one of rapidly growing industries that relies on mobile teams.

Home Healthcare Industry

For example, home-based healthcare services are seeing an impressive growth in recent years.  

Providing a patient-oriented approach requires a specific set of skills and personality traits in nurses and caregivers, including dedication and compassion.


Finding quality candidates who are willing to travel throughout the day for work can be challenging. In addition to this, healthcare is already a high-stress environment. 


Implementing a reasonable mileage reimbursement policy can give home healthcare agencies a competitive advantage in attracting top talent. 

The Importance of Proper Reimbursement

For certain industries, like home healthcare, travel is an important part of employees’ everyday work. In such environments, failing to have employee mileage reimbursement policy in place can have a negative impact on your organisation.


Developing a fair compensation policy can help organizations avoid employee turnover or violating labor laws, as some states require the standard mileage reimbursement rate to be enforced. 


Such policies will ensure your field workers are compensated appropriately, and also clearly state what travel will be eligible for reimbursement, and at what rates.   

Key Takeaways

Before you develop any internal procedures and implement an employee mileage reimbursement program, it’s good to get acquainted with the regulations and laws about this issue.


Although reimbursing your team for mileage is an additional expense for businesses, it’s also a way to support your most valuable asset - your employees and give your business a leg up in a race to attract and retain best performers. 


Exceeding or at least meeting the federal standard rate is a great way to retain your exceptional employees and attract qualified candidates. If your enterprise can’t afford to increase pay, improving compensation can be translated as additional income. 


When choosing a tracking app, make sure it comes with a set of features that will streamline your everyday business operations.


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