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, it's best to check the legislation in the state you’re operating in with your legal advisor or accountant.
This article will help you better understand IRS mileage reimbursement rules, regulations, and rates, enabling you to make informed decisions when reimbursing your field teams for mileage.
Accurately track employees' business mileage in real-time
Discover how to streamline mileage reimbursement and stay IRS compliant
Mileage reimbursement is a form of compensation for the mileage costs associated with using employees’ personal vehicles for work purposes. This refund doesn’t apply to regular commutes to and from work.
In certain states, it's a legal requirement to refund your employees' mileage costs. For example, the laws in Illinois, Massachusetts and those outlined in California Labor Code 2802 are the most stringent.
These laws require employers to reimburse their teams for necessary business-related expenses, including mileage compensation.
What Constitutes Work-Related Mileage?
Before developing your employee mileage reimbursement program, it is essential to list all forms of business trips your employees will be reimbursed for. Make sure to include them in your company travel policy.
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:
Performing business-related transactions in banks
Meetings or visits with clients and customers
Providing at-home services
Home healthcare services
Transporting clients to a destination
Travel to a temporary job site
Travel to a business convention or conference
All other work-related errands.
With the types of business trips listed in your policy, your workers will understand what they will be reimbursed for and at what rates.
What Are the IRS Mileage Reimbursement Rules?
To better understand how to calculate mileage reimbursement, let us first address the IRS mileage reimbursement rules. The Internal Revenue Service issues a new optional standard mileage rate every year.
This rate, or the deductible mileage, fluctuates yearly and is only an estimate. When determining the standard mileage rate, the IRS considers 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 reasonable, you can choose to reimburse your field staff at a lower or higher rate.
14 cents per mile in service for charity organizations
It is important to note that there are two exceptions to this rule. The standard mileage rate must be used in the first year the car is available for business use. In later years, employers can opt for the actual cost if they want to.
Regarding leased vehicles, if standard mileage rates are chosen, they must be applied for the entire lease period, including renewals.
Are Mileage Reimbursements Tax Deductible?
As mileage reimbursements are tax deductible, your company can write them off as business expenses and save money on taxes. Plus, your mobile workforce will appreciate getting paid for their travel costs.
The tax treatment of mileage reimbursement depends on whether a taxpayer is an employee or a self-employed worker. Starting from the tax year 2018, employees cannot report mileage reimbursement on their income taxes due to the deduction elimination for unreimbursed employee expenses by the Tax Cuts and Jobs Act.
On the other hand, self-employed workers can report mileage reimbursement as a business expense on their taxes. They can choose between the standard mileage deduction or the actual expense method to calculate the deduction.
To support the deduction claim, they must keep a log of qualifying miles and record odometer readings at the beginning and end of the tax year. Then, when filing for tax returns, self-employed workers can report their mileage expenses on Schedule C of IRS Form 1040.
So, mileage reimbursement through their employer is the only way employees get refunds for using their vehicles for work.
Still, employees must remember that a mileage reimbursement rate that exceeds the standard federal rate is taxable. This is because it is considered to be an excess income.
Please note that tax regulations may vary, and it's advisable to consult a tax professional or refer to the most up-to-date IRS guidelines for accurate and specific information related to your situation.
How Do You Reimburse Mileage Properly?
Companies must record their employees’ business mileage properly to provide them with tax-free compensation. In addition, these mileage logs need to be accurate and compliant with IRS rules.
What is Required On a Mileage Log For the IRS?
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 times,
the purpose and the date of the trip, as well as
the mileage at the beginning and the end of the trip.
The same applies to every single trip your field employees undertake.
As technology advances, paper forms, spreadsheets, and other outdated methods are becoming obsolete and giving way to more accurate, efficient, and modern systems.
Smart software solutions have become an irreplaceable ally in tracking speed, distance, and the exact time for each location. They enable a well-organized and straightforward 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, which 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 also come with different costs. So, increasing your rate is a logical step if your organization operates in an area with higher expenses (like gas and tolls).
The same goes for conducting business in a less expensive region - employers can consider lowering their employee mileage reimbursement rates.
As mentioned above, knowing the additional fees a higher rate can incur is important when deciding on a rate. A rate exceeding the standard federal rate is treated as an excess income taxable for the employee.
On the other hand, opting for the federal standard mileage rate can be a good fit for your business.
How Much to Reimburse 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 how much to reimburse for mileage.
So, How to Calculate Mileage Reimbursement for Employees?
Most companies consider the standard IRS rate and design their policies around the IRS-established 65.5 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.
But this doesn’t necessarily mean you must adopt the same approach. As discussed below, there are more ways to structure a fair employee mileage reimbursement program.
How to Calculate Mileage Reimbursement?
Businesses can adapt their mileage reimbursement rates and consider driving costs in their area 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 the FAVR approach to reimbursing employees, an employer is required to pay a combination of mileage reimbursement payments and a monthly allowance:
A fixed amount that covers fixed costs associated with owning and driving a vehicle, such as insurance, registration fees, or lease
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 on 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 the miles your mobile workers drive are for business, total vehicle expenses are multiplied by 50%.
Typical costs included in the Actual Expenses Method are gasoline, insurance, maintenance, lease payments, tires, and depreciation.
Another important thing for business owners to remember is that calculating employee mileage reimbursements is much easier with the help of smart software solutions like Timeero.
In the next section, we’ll address automated mileage tracking and its role in streamlining mileage reimbursement.
It’s also good to know that employee mileage is tax deductible even without a reimbursement program.
How Do I Reimburse My Team Fairly and Accurately?
So, employers can decide how to pay their field teams for mileage. To create a fair compensation program, you should follow the best practices for mileage reimbursement in your industry and the IRS mileage reimbursement rules for employers.
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. Then, to make things even simpler and more accurate, opt for one of the best mileage-tracking apps, such as Timeero, that integrates with payroll software.
The traditional approach with spreadsheets is time-consuming and error-prone. With mileage tracking software, your mobile employees won’t have to log their miles manually anymore; you don’t have to rely on employee trust.
For example, Timeero tracks and records all the relevant data for accurate mileage reimbursement and suggests the shortest route to cut your expenses.
It’s a win-win situation as inflation of mileage is eliminated on the one hand, while on the other, your workers get fair compensation for travel expenses.
Benefits of Offering Employee Mileage Reimbursement Policy
Successfully attracting and retaining top talent, and keeping your employees engaged and productive, are essential for running a successful company. Fair compensation for your workforce is a vital step towards this goal.
On that note, having a reimbursement program in place comes with certain benefits beyond compliance with federal and local laws.
Happier Employees and a More Positive Work Environment
Paying your staff fairly is important in keeping them happy and feeling valued and appreciated as professionals and human beings.
Moreover, reasonable compensation for your mobile workers helps foster a more positive work environment, ideal for boosting productivity and efficiency among your workforce.
Mileage reimbursement programs can also contribute to employee retention. It's important to remember that exceptional workers have choices about where they want to work; thus, properly compensating your employees is a step toward retaining them within your organization.
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 policy, a decent salary, and a positive work environment can help your business become a top choice for the best performers.
And with a dedicated, highly-skilled workforce, businesses can expect remarkable results.
Paying Less in Taxes
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.
How Can Timeero Help Me Comply With IRS Mileage Reimbursement Rules?
Timeero is a GPS time tracking and mileage tracking app that can help you comply with IRS mileage reimbursement rules.
Tracking Employee Mileage Accurately and Easily
When your employees clock in from their mobile devices, Timeero automatically starts logging their business mileage.
All you have to do is choose employees whose mileage will be tracked and set their reimbursement rates.
Timeero recognizes driving speed and logs mileage accurately, even in areas with weak or no connectivity. Even if an employee forgets to track mileage, Timeero offers an easy solution to cover all scenarios.
So, while your employees are on the clock, you can see their locations and routes in real-time and retroactively. Capturing miles stops as soon as they clock out, so there is no need for privacy concerns and it can help you avoid employee pushback.
Generating Clear And Easy-To-Read Mileage Logs
Timeero automatically creates Mileage Logs, ensuring all necessary information the IRS demands is captured.
You can see information on mileage and routes on every timesheet and run detailed mileage reports.
Viewing Employee Routes
Timeero comes with the Route Replay Feature, which shows you the business travel routes, including start and end locations and times and time-stamped breadcrumbs along the way. You can even see the vehicle's speed, enabling you to improve your driver's safety and gas economy.
We’ve already mentioned Timeero’s Suggested Mileage feature. Still, it is a great tool to help you improve your employees' mileage accountability so that you can avoid paying for longer scenic routes, cut down your costs, and use your resources more efficiently.
And if, besides mileage reimbursement data, you want to grasp all the business routes your field employees had in a workday at a glance, the segmented tracking shows all this information in a visual timeline.
Business trips, with details such as start and end times, distance and travel duration
Jobs and locations and the exact time spent there
And if you’re in for more detail, you can replay each segment using breadcrumb technology.
Easily Export Mileage Reimbursement Data For Accurate Reimbursement
All time and mileage-related data Timeero gathers can help you streamline your payroll and mileage reimbursement workflows.
There is no need for manually imputing data on working hours and mileage; Timeero tracks all this for you. Of course, you can export this data to CSV and PDF, but even better, you can securely share it with the software you use for payrolls, such as:
Run Powered by ADP
ADP Workforce Now
Even if you’re not using a platform from this list, Timeero offers Public API for customized integration options.
Other Notable Features
Time and attendance tracking
Files and photo attachments
IRS Mileage Reimbursement Rules: Key Takeaways
A fair employee mileage reimbursement program can help avoid losing employees or breaking labor laws. As we already mentioned, some states require that employees are compensated for their work-related expenses, including mileage.
A mileage reimbursement policy is important for ensuring your workers are paid correctly for travel and clearly stating which travel types can be paid back and at what rates.
Before establishing a policy or starting a mileage payback program, it's good to understand the relevant laws. Even though paying your team back for mileage costs extra, it's a way to look after your employees. This can give your business an edge in attracting and keeping the best workers.
Matching or even going beyond the federal standard rate is a good way to keep your best employees and attract new ones.
And if your business can't afford to raise salaries, mileage reimbursement can be seen as a pay increase. Again, this can help your company stand out in the competitive job market.
When choosing the app for tracking mileage for work, remember that besides accurately tracking mileage for IRS-compliant logs and reimbursement, Timeero comes with a set of features to streamline your everyday business operations.
You can check out our Timeero Review to learn more about what the software offers. Or, just sign up for a free trial and see for yourself.
Track mileage accurately, streamline reimbursement and stay IRS compliant.
Andjelka is a sociologist turned digital marketer. She specializes in creating content for SaaS and software companies. When she’s not researching the most effective employee management techniques, Andjelka loves cooking, reading, and fighting for human rights.