Mileage reimbursement is an essential business practice used to ease the burden of travel expenses on employees. Travel expenses vary across workforces based on fixed costs like vehicle insurance and variable costs like gas. To compensate each employee fairly, you must calculate mileage reimbursement according to individual cases and current trends.
We’ve compiled a step-by-step guide on how to calculate mileage reimbursement accurately from scratch. In our walkthrough, we’ll tell you why using one of the best GPS mileage tracking apps, like Timeero, is important. But before we reveal the steps, let's get the basics out of our way.
Simplify Mileage Reimbursement.
Timeero tracks business mileage and routes accurately.
Mileage reimbursement is the amount you compensate employees for expenses incurred while using their personal vehicle for business-related activities. Reimbursement covers costs such as:
Gas
Oil changes
Tires
Maintenance and repairs
Vehicle insurance
Vehicle depreciation
Toll and parking fees
According to the Internal Revenue Service (IRS), a mileage expense should be appropriate to your business and a common standard in the industry. In other words, you’re only obliged to reimburse employees for business use of their personal vehicle. Any expenses incurred while running personal errands are not eligible for reimbursement.
When the IRS says “personal vehicle,” they mean one owned or leased by the employee.
Does the Law Require Me To Reimburse Mileage?
Federal law doesn’t require businesses to reimburse employees for business travel. The IRS doesn’t have policies mandating mileage reimbursement, either. However, this does not mean that there are no laws at the state or local level that have an interest in mileage reimbursement.
Some states, such as Illinois, Massachusetts, and California, have laws that require business owners to compensate employees for business-related expenses. This doesn’t mean businesses outside these states aren’t bound by any legal considerations to adopt a mileage reimbursement policy.
Remember that the Fair Labor Standards Act (FLSA) requires employers to pay nonexempt employees at least the federal minimum wage. If you fail to reimburse employees for mileage, and as a result, their take-home falls below the federal minimum wage, you could be in for a hefty penalty of up to $1000 per violation.
Mileage Reimbursement Methods
There are various ways to compensate employees for mileage. We’ve listed the top three methods below.
Actual Expenses
With the actual expense method, employees track the total actual costs of operating the vehicle. This includes gas, tires, vehicle depreciation, maintenance and repair, insurance, lease payments, toll, and parking fees.
Employees track these expenses over time and get reimbursed when they submit the expense report. An acceptable expense report includes proof of each payment and a detailed mileage log showing the purpose of each trip and total miles traveled.
While the actual expense method gives a clear depiction of business expenses, it can be laborious for employees to consistently track and report costs accrued. Another downside with using the actual expense method is that business and personal vehicle use can sometimes overlap, making it difficult to determine which figure goes into the business expense report.
Actual expenses can also complicate taxation for both the employee and employer. The employee still has to keep an eye on IRS mileage rates. If the compensation is higher than the standard rate for the tax year, the excess amount is deemed taxable income.
On the other hand, if the amount is less than the standard mileage reimbursement rate, employees can claim mileage deductions to compensate for the difference.
Fixed and Variable Rate
The Fixed and Variable Rate (FAVR) method is a combination of a monthly stipend given to cover fixed costs and a cent-per-mile compensation to cover variable costs.
The monthly allowance covers fixed costs such as vehicle license and registration fees, insurance, lease payments, and depreciation costs.
The cent-per-mile rate covers variable costs such as gas, oil, maintenance, and repairs.
The FAVR method ensures each employee is compensated fairly, especially when the monthly allowance is tailored to each individual’s fixed costs. You can adjust the variable costs to reflect the current inflation rate to enhance reimbursement accuracy. Learn more in our FAVR car allowance guide.
Again, you have to track the IRS standard rates against the actual compensation. If the amount paid is higher than the standard rates, the excess is taxable. Another thing to note is that even if you use the FAVR method, you must keep detailed mileage records.
IRS Standard Mileage Rates
Using the standard mileage rate is straightforward. This method enables businesses to compensate employees on a cent-per-mile rate for using their own vehicles for business. The IRS reviews the standard rate yearly, using a formula that examines fixed and variable car expenses.
The most significant benefit of using the standard mileage rate is that employees don’t have to combine a litany of invoices, receipts, or expenditure breakdowns to claim a reimbursement.
They only need to track business mileage and multiply the number of miles by the current IRS rate. The simplified approach eliminates the complexity of detailed documentation associated with the actual expense method and doesn’t leave much room for human error.
However, the standard mileage rate isn’t without fault. While the reimbursement amount is enough to cover employees’ travel expenses, in some rare cases, low-mileage drivers are underpaid.
How to Calculate Mileage Reimbursement Using IRS Standard Mileage Rates
Calculating mileage reimbursement using the standard mileage rate is super easy. But you must still be mindful of the underlying IRS regulations to maintain strict compliance.
Let’s take a look at the basic formula for calculating mileage reimbursement below.
Calculate Employee Total Mileage
The IRS requires that when employees track business miles for reimbursement purposes the following details must be included in the record:
Mileage at the beginning and end of the trip to calculate the total distance covered
Starting and ending points
Purpose of the trip (business, charity, medical or moving)
Starting and ending times
Timeero’s mileage records include all of the relevant details required by the IRS.
When you record mileage via manual mileage tracking, the process used to ensure each trip meets the IRS standards can be tedious and time-consuming. Manual tracking is also prone to errors, such as when employees forget to record odometer readings at the start or end of the business trip.
Rather than deal with these drawbacks, we recommend using an automatic mileage tracker like Timeero. The app uses motion detection technology (with GPS precision) and a minimum speed threshold to track employee mileage.
It records mileage with unwavering accuracy, and employees don’t have to lift a finger to record the nuances of trip purpose, date, time, and total mileage. Timeero does the heavy lifting, leaving employees with the light duty of generating a mileage report at the end of the month to claim a reimbursement.
Deduct Employee Personal Drive
According to the IRS, employees should be reimbursed for business trips only. This means that when an employee tracks mileage, you must deduct personal mileage from their mileage log.
Suppose an employee uses their car to attend a charity event 100 miles from your office. During their lunch break, the employee makes a 10-mile trip to meet their friend before returning for the afternoon session. The employee will log 220 miles on that day, but 20 miles were for personal purposes and must be excluded from their business log.
Our example makes deducting personal miles sound simple, but that will not always be the case.
If you don’t have a tracking system in place to determine where an employee has been during the day, the 20 miles logged could potentially end up on your company mileage log.
If 10 of your employees add 20 miles to your business log daily, that’s 200 miles a day. You'll significantly chip away at your profits if you continue reimbursing employees for personal mileage.
With Timeero, you don’t have to worry about overlapping business and personal mileage. To combat this issue, the app tracks mileage only when the employee is clocked in. It tracks mileage for business purposes, minimizing the risk of employees adding their personal drives to your business log.
Timeero tracks mileage when the employee is on the clock.
Another feature used to accurately allocate mileage is Route Replay. This tool allows you to trace where an employee has been during the day. In our earlier example, Route Replay quickly shows you that the employee drove away from the venue for a personal drive.
Deduct Employee Commuter Mileage
The IRS considers commuting miles to be personal miles, which should be deducted from employees’ logs. Commuting miles constitute the distance the employee travels from home to their place of work.
Suppose an employee has to attend two trade shows 100 miles apart before returning to the office. The first trade show is 10 miles from the employee's home, and the second is 35 miles from the office. You may request the employee to clock in as they leave home and end their shift at the office to track their movement.
Timeero will track their round trip from home to the first and second shows and back to the office — a total of 145 miles. However, only 135 miles are reimbursable: the 10 miles from home to the first trade show counts as commuting distance.
Timeero’s Commuter Mileage tool deducts an employee’s commute automatically. You only need to set the employee commute distance for the day as 10 miles. The app will automatically deduct the commute miles from the employee mileage log at or before midnight.
By now, your mileage logs should meet the IRS standards. They include mandatory tracking details while omitting personal and commute drives. But even with accurate mileage logs, getting employee reimbursement right can still be a hassle.
The IRS provides three mileage reimbursement rates:
Business
Charity
Medical or Moving
To provide accurate reimbursement rates you must multiply employee mileage with a rate that matches the purpose of their trip.
Sorting individual cases manually and then deciding which rate applies to each employee trip can be tedious and often error-prone. To remove these complexities, Timeero gives you the flexibility you need to set company or employee mileage rates.
If company travel is solely defined by one category in your business, (business, charity, or medical) you can set a universal mileage rate under the “company settings.” This rate will apply to everyone in your company. However, if different employees make different trips, you can set individual rates under the user’s “additional settings.”
You can set company-wide mileage rates or configure them for individual employees.
Suppose the two employees we used in our earlier examples work for your company. You can use the IRS rate for charity for the first employee and the business rate for the second. The Timeero mileage reimbursement calculator will automatically compute their total reimbursement based on the predefined rates.
Reimburse Employees
Laws regarding employee reimbursement obligations differ across states. Be sure to get the correct interpretation of the law in your state to stay within the guidelines. Once you compute reimbursement totals, the next step is to reimburse employees for vehicle expenses.
Timeero enables you to generate and export reimbursement reports into your payroll and accounting software for fast reimbursement. The app also integrates with QuickBooks Desktop, QuickBooks Online, Paychex, Gusto, Xero, ADP, and Paylocity to expedite reimbursement.
When you reimburse employees for vehicle expenses, you automatically qualify for an income tax break. The tax deduction isn’t offered automatically. You have to file the relevant form when the tax return period rolls around to claim the tax benefit.
There are different forms, including Schedule C, Form 1040, and Form 4562. What applies to you depends on your business type: self-employed driver, small business owner, or large corporation. Check with the IRS to confirm which files you need to complete to get the tax deduction.
Use Timeero to Reimburse Employee Fairly
Regardless of which reimbursement method you choose to use, you still have to track employee mileage. While manual tracking gets the job done, it’s laborious, time-consuming, and error-prone. It can lead to over or underpayments and significantly impact tax deductions.
To compensate employees fairly and maximize tax deductions, use an automatic mileage tracker like Timeero. Timeero tracks mileage with GPS precision, ensuring that each employee’s mileage log is accurate. It also auto-classifies employees' trips, so no personal drive ends up on the business mileage log.
Start a 14-day free trial today to test Timeero’s mileage tracking and reimbursement capability. No credit card is required: create your account and start tracking mileage immediately. Book a consultation with our customer support team to discover how you can make the most of Timeero's features.
Calculate Mileage Reimbursement: FAQs
How Do I Calculate Mileage Reimbursement?
To calculate mileage reimbursement, track mileage with Timeero and let the automatic mileage reimbursement calculator do the math for you.
Samson is a mathematician turned content marketer specializing in SaaS and Tech content. He focuses on the practical aspects of software systems while keeping abreast of the industry’s cutting-edge principles to create informative and engaging content. When he’s not writing, Samson spends time playing or watching soccer.
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