Mileage reimbursement rules for employers

UPDATED JAN 22, 2020 - 5 MIN READ

Whether your employees drive company cars or drive their personal vehicles for business, you need to reimburse your employees for their expenses. Depending on which your state, 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 a 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 you. This is because reimbursements are deductible business expenses, so it actually helps you pay less in taxes.

In this article, we'll go through the rules for employers and business owners with regards to mileage reimbursement and allowance, the choices you might have and best practices for a mileage reimbursement program. 

So, do I have to reimburse my employees?

Maybe. This really depends on the laws in your state. We suggest you check with your legal advisor or accountant to be sure.

What you need to know about the IRS's standard mileage rate

Every year, the IRS sets a new optional standard mileage rate. It 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 off of that income. Should they, however, be reimbursed over that amount, the excess is taxed as pay.

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.

What are the common alternatives to using the standard mileage rate?

There are two common alternatives to using a standard rate reimbursement: A mileage allowance and FAVR.

Mileage allowance

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 car. 

The administrative burden of paying an allowance and accounting for expenses afterward 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)

A common alternative 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. Also, you still have to be aware of the IRS' standard mileage rate and compare your total reimbursement to the IRS'. Once again, any excess amount is taxed.

Best practices for your mileage program

To keep things simple, most companies use an app for mileage tracking and uses the IRS's standard mileage rate. It saves time for employees who no longer have to manually keep mileage logs, and administratively it's the easiest solution. It also avoids inflation of mileage while making sure your employees get what they're entitled to.

While Driversnote is one such app, we recommend you research some options for automating mileage tracking and record keeping.

Of course, the best mileage reimbursement program is also IRS compliant. Read on to see what that means for you and your employees.

You need an Accountable Plan

The IRS defines the 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 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.
  • It must be adequately accounted for.
  • Any excess must be returned with a "reasonable period of time".

This simply 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 happens). 

Also, any excess that was paid out to an employee must be returned within a reasonable period of time.

How long is a "reasonable period of time"?

The IRS sets the standard reaction time to 120 days when it comes to keeping records and reimbursements up to date. The IRS writes:

  • You receive an advance within 30 days of the time you have an expense.
  • You adequately account for your expenses within 60 days after they were paid or incurred.
  • You return any excess reimbursement within 120 days after the expense was paid or incurred.
  • You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.

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.

Can I reimburse all my employees the same way?

Not necessarily. If you use the IRS's standard mileage rate, each employee has to qualify separately. They also have to keep adequate records and meet the rules of accountable plans. To read more about things from an employee's perspective, we refer to our guide for employees.

 

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for, legal, tax or accounting advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal, tax or accounting advisor.