As a business owner, you know that compensating your employees for work-related mileage has become essential. Especially those with mobile or remote teams understand how crucial such a benefit is to their workers.
Even though mileage reimbursement is most commonly not required by the law, it is considered a good business practice beneficial for both employees and employers.
However, to make the most out of this practice as an employer, you need a solid employee mileage reimbursement policy and efficient procedures to follow through.
Read on as we cover everything you need to know about mileage reimbursement policy, from its mandatory elements to how to implement it most efficiently and avoid the most common mistakes.
You can also download and use our free mileage reimbursement policy template to customize it to fit your company's needs.
Reimbursing your employees for the costs of using their vehicles for business-related purposes is one of the key benefits a company can offer to its employees.
In certain states, such as Illinois, California, and Massachusetts, reimbursement of such expenses is also required by the law.
Furthermore, mileage reimbursement is federally required when failure to compensate employees' costs would lower their net wages below minimum wage. A company could be open to lawsuits and financial penalties in such cases.
Even if this is not a requirement in your state, and you don't have such an obligation, it is still good to implement a mileage reimbursement policy in your company.
The benefit for employees who use their vehicles for business purposes is quite apparent - they will be happy that they do not have to spend their own money. They will also appreciate you as an employer for covering these expenses. Consequently, mileage reimbursement will benefit the employer as employees' job satisfaction, engagement, and retention improve.
But employers will see other benefits as well. Using current mileage tracking best practices, reimbursing employees for mileage can be more cost-effective than financing the company's vehicles. Furthermore, mileage reimbursement is tax-deductible for companies. In addition, when a company with such a benefit needs new workers, it will be able to attract more top candidates and retain them.
However, to reap all these benefits, you need a solid mileage reimbursement policy for employees to establish the most effective practices.
Your mileage reimbursement policy must define which expenses will be reimbursed and under which circumstances. It also must determine how employees will track their mileage, what documents they need to claim the compensation, and the deadlines.
As there are many potential pitfalls, a clear, well-structured mileage reimbursement policy will dismiss any doubts your employees might have about the procedure.
This way will guarantee that your company receives the full tax-deduction benefits, protecting your business and your employees.
Your mileage reimbursement policy's introductory part should clarify all the core principles.
You can begin by stating that the mileage reimbursement program reimburses employees for any reasonable and necessary work-related miles driven using their vehicles - cars, bikes, or vans.
In the very beginning, you should define what is considered a reimbursable business trip when using a personal vehicle. It can help to use the IRS definition and guidelines, which state that the trip must be ordinary - common and accepted in the business or trade, and necessary - helpful, and appropriate.
So, in your definition, you can stress the following points:
It must be clear from your definition that if an employee has used a business trip as an excuse for a personal errand, the company won't reimburse their expenses.
Your mileage reimbursement policy should also clearly state that the commute between home and normal work location does not qualify for compensation.
However, if an employee has more than one normal work location, you can specify that your company will cover the mileage traveled in the same workday between those work locations.
Following the same logic, if an employee temporarily works in a different location than their regular, the company will reimburse mileage over the usual commute miles.
If you're opting for the "shortest route" mileage reimbursement, you must also state this in your introductory part, as well as the method of determining this route.
With its shortest route feature, Timeero, a GPS mileage tracking tool, can show your employees the preferred way to take, protecting your company's budget and your employees' pockets.
After you've explained the concept of a reimbursable business trip, it's beneficial to provide specific examples. The goal is to discard any doubts your employees might have regarding their reimbursement claims.
You can start with a list of allowable mileage expenses that can be reimbursed, such as:
Think of all the situations you would like to include in your list, and personalize it to fit your company's circumstances.
Your mileage reimbursement policy should also include concrete examples to show employees what expenses they can claim. Here's an elementary example:
Maria drives their car to a meeting and back. The distance they traveled was 40 miles each way. Maria's normal commute is 5 miles each way, so they must deduct 10 miles from the reimbursement claim. In this example, Maria can claim reimbursement for 70 miles.
Or another one:
John dives their bike from their office to the client's home to provide the service. The shortest route to the client's home is 10 miles away. Still, he chooses to take a longer but scenic route 3 miles longer. If you're following the shortest route policy, John can only claim reimbursement for 10 miles.
An anecdotal example is easier to understand than a theoretical concept. Therefore, the more examples you provide in your mileage reimbursement policy, the easier your employees will grasp the policy's main points.
Once you've set out the foundations of your mileage reimbursement policy, it's important to tell your employees how you will calculate their compensation and what expenses the reimbursement covers.
Most companies compensate their employees using the Standard Mileage Rate. The rate is determined by the IRS every January. It covers both the fixed (the cost of maintenance, gas, oil, and repairs) and the variable expenses (insurance, registration, lease payments, and depreciation) of operating a vehicle. The Standard Mileage Rate doesn't cover the toll and parking costs. This year the IRS officially established the rate at 58.5 cents per mile driven for business purposes. The amount employees get is tax-free if the reimbursement does not exceed the IRS business rate with the proper documentation.
The Standard Mileage Rate doesn't consider geographical differences or the model of a vehicle an employee uses. To better fit employees' actual costs, some companies, especially those with employees across the country, choose a "fixed and variable plan" (FAVR) that considers location-specific data.
You can also set your own mileage reimbursement rate if you wish. However, if the rate is higher than the standard mileage rate, your mileage reimbursement policy should clearly explain that these payments will be classified as taxable income and will no longer be deductible.
After you've introduced the basic concepts, the next step is to inform your employees about their responsibilities regarding their business mileage claims.
Employees need to provide a detailed mileage log and use it to file their expense reports. To comply with the IRS requirements, their claim needs to provide the following details:
The IRS doesn't require any specific method for recording as long as data is accurate and verifiable. However, your mileage reimbursement policy needs to instruct the employees on how to best record their miles.
You can instruct your employees to manually enter the odometer data into a mileage log form template or use a GPS mileage tracking tool, such as Timeero, for accurate and verifiable data available with a single click on their mobile device.
Our Mileage Tracking Blog section contains many valuable articles tackling the accuracy and relevancy of reported mileage and its implications on your business. Check out these helpful resources to make the most out of your mobile reimbursement policy.
Setting a timeframe for the backlogging in your mileage reimbursement policy can also be beneficial, so consider what will suit your business needs the most.
As you can see, drafting your mileage tracking policy is all about establishing practices that will make the entire reimbursement process more efficient and transparent. It's also a chance for your company to review the existing practices and determine how to improve them.
The first thing to check is your company's method of tracking employees' mileage and recording it. If you are still using manual mileage logs, there is much room for advancement.
Apart from being extremely time and energy-consuming for your employees, manual mileage logging is prone to human error and fraud, thus hardly accurate and reliable.
Besides, the data such software provides is easy to verify and immune to human mistakes and fraudulent practices. Using such a solution, you can rest assured that all your reports will be clean and valid if the IRS knocks on your door.
As it can integrate with the most common payroll solutions, Timeero can streamline your operation and save your personnel time through automation.
We would also advise analyzing your existing mileage records to determine your employees' accountability regarding traveled miles.
As we've already mentioned, some company mileage reimbursement policies are based on the "shortest route" concept.
One of Timeero's features is to suggest the shortest route to an employee, strengthening their sense of accountability. If your company has many mobile employees, compensating for the shortest route mileage can save significant financial resources.
Reimbursing your employee's business-related miles can be a substantial cost for your company. Although you want to compensate your employees adequately, you don't want your company paying for the extra mileage or getting into a legal dispute with the IRS.
So before you start drafting your mileage reimbursement policy, you need to check whether your state has any requirements regarding the matter.
Then, it is time for you to review all the current practices and make some well-informed decisions on the reimbursement model you will use and the methods to track mileage.
Use this opportunity to improve your practices by switching to GPS mileage tracking solutions, such as Timeero.
After making these decisions, drafting a mileage reimbursement policy shouldn't be a problem using the guideline above. In addition, you can download our company mileage reimbursement policy template if you like, which you can modify and tailor to your company's needs.