Mileage reimbursement rules for employers
Whether your employees drive company cars or their personal vehicles for business, you might need to reimburse your employees for their expenses. Depending on which state you're in, this might even be a requirement.
There are no federal laws that force you to reimburse your employees for their transportation expenses but check state legislation to be sure. There are also certain benefits to having an employee reimbursement program, namely that it can help keep your employees happy and even attract new ones. If done correctly, employee reimbursement is tax-free for your business - reimbursements are deductible business expenses, so it actually helps you pay less in taxes.
In this article, we'll go through the mileage reimbursement rules for employers and business owners with regards to mileage reimbursement and allowance, the choices you might have and best practices for an employer mileage reimbursement program.
Mileage reimbursement rules
You are not obliged by the government to pay out mileage reimbursement to your employees, but this can vary at a state level. We suggest you check with your legal advisor or accountant to be sure.
You need an accountable plan for your employee reimbursement
The IRS defines the mileage reimbursement rules for recording and reimbursing mileage (all transportation expenses in fact) that both you and your employees must live up to. In short, there are three IRS mileage rules to qualify for an accountable plan:
- The reimbursement must stem from services done for an employer, i.e. a trip driven for business - not commuting to and from work.
- Employee mileage and payments must be adequately accounted for.
- Any excess mileage paid out must be returned within a "reasonable period of time".
This means that your employees must keep records that are updated fairly frequently (weekly is fine, but they are more accurate when updated as an expense occurs).
Also, any excess mileage reimbursement that was paid out to an employee must be returned within a reasonable period of time.
What the IRS defines as a “reasonable period of time”
The IRS mileage rules set the standard reaction time to 120 days when it comes to keeping records and reimbursements up to date in your company.
- Employees should receive a payment within 30 days of having business mileage expenses.
- Employees should be able to adequately account for their business expenses within 60 days.
- You provide employees with a periodic statement (at least quarterly) that asks employees to either return or adequately account for outstanding advances.
- Employees should return any excess reimbursement within 120 days of the payout.
If you stick with monthly payouts and settle with your employees every quarter, making sure any excess is returned within the following months (120 days max), you will qualify for an Accountable Plan, assuming their recordkeeping is in order.
Try an employee reimbursement program for teams
You can try our team option if you are a manager or an employee looking for a solution for your team.
Our Teams option allows you to more easily follow mileage reimbursement rules, and reduce your managers' and employees' workload. Quickly review and validate your team’s reimbursement claims with easy workflows for submitting and approving mileage.
Check out our guide on setting up a team and let us know if you have any additional questions.
Employee reimbursement methods
There are a few methods your business can choose to use as a reimbursement program.
The IRS standard mileage rate, a mileage allowance, or paying out a fixed and variable rate. The most common employee reimbursement is the standard mileage rate due to its simplicity. Read more about each method and see what will best fit the employer mileage reimbursement program.
IRS standard mileage rate
Every year, the IRS sets a new optional standard mileage rate. It is meant to cover all costs of owning and running the employee’s vehicle for its business use and represents the highest that you can reimburse each mile driven for business and still get a full deduction.
The same goes for your employees: If they are reimbursed at the standard mileage rate, they do not pay tax on it, as it will not be considered income. Should they, however, be reimbursed over that amount, the excess is taxed as income.
Learn more about how the standard mileage rate for business is set and see current and historical rates here.
You can choose to use either a lower or higher rate than the one set by the IRS, but most companies consider the IRS rate the standard.
An allowance is paid upfront, typically every month, and then settled later using a mileage rate. You can give an allowance to make sure your employees have cash on hand to cover their expenses, such as lease payments on their cars.
The administrative burden of paying an allowance and accounting for expenses afterwards can be cumbersome if you don't have a streamlined payment process.
Even if you use an allowance, you and your employees still need to be aware of the IRS' standard mileage rate. If the allowance comes out to a higher reimbursement than would have resulted from using the IRS' standard mileage rate, the excess needs to be returned. If it isn't returned, the excess needs to be reported as pay and be taxed.
FAVR (Fixed and Variable Rate)
Another common alternative to the standard mileage rate is FAVR, under which you pay
- a fixed amount to cover your employees' fixed costs (lease or depreciation, insurance, etc.)
- a cents-per-mile rate to cover your employees' variable costs (gas, maintenance, oil, etc.)
You cannot use the IRS' standard mileage rate to cover only variable costs. You still have to be aware of the IRS' standard mileage rate and compare the total FAVR paid out to the IRS'. Once again, any excess amount is taxed.
Best practices for your employee reimbursement program
In order to adhere to mileage reimbursement rules, most companies use apps for mileage tracking and use the IRS standard mileage rate reimbursement method. It saves time for employees who no longer have to manually keep mileage logs, and administratively it's the easiest solution. It also avoids the inflation of mileage claims by employees while making sure they receive the reimbursement they're entitled to.
While you can use our mileage tracker app, we recommend you look around and find options that best suit your business’ needs for automating mileage tracking and record keeping.
How to automate your mileage logbook
IRS Mileage Guide
- Mileage rates 2020
- IRS mileage rate 2021
- IRS mileage rate 2022
- Is reimbursement taxed?
- IRS medical and charitable mileage
- For employers
- For employees
- Mileage log requirements
- What is the IRS mileage rate
- Calculate your reimbursement
- Current mileage rates
- For self-employed