Mileage reimbursement for employees

UPDATED JAN 20, 2020 • 6 MIN READ

As an employee in the US, you might be entitled to have your mileage or transportation costs reimbursed by your employer. While there are no federal laws requiring employers to reimburse their employee’s mileage, state laws sometimes require mileage reimbursement. This is the case, for example, in California.

This guide is for employees who want to know about mileage reimbursement. We've written a separate guide for business owners and another for self-employed. We aim to provide an overview of:

  • mileage reimbursement rules for employees
  • what to expect from your employer,
  • how to track and log mileage
  • how to report at the end of the tax year.

There are two main cases for mileage reimbursement:

I own or lease the vehicle

If you own or lease the vehicle you drive for business, your employer might reimburse both the cost of owning and operating the vehicle. Although only the business portion of use.

Your employer can use the IRS's mileage rate for business instead of having you record all your expenses. If your employer reimburses at a rate that's the same as or lower than the IRS's, your reimbursement is tax-free if you live up to IRS' rules of accountable plans (scroll down for an explanation about accountable plans) 

Your employer should tell you what rate to use and which records they need from you.

Finally, unless your employer objects, there's nothing to say you can't use multiple vehicles. 

The vehicle is provided by my employer

If you drive a vehicle owned by your employer, you may still be able to get reimbursed for the expenses of driving and operating the car — for instance, expenses for gas, parking, and tolls. The amount you are reimbursed is tax-free.

You can’t use the standard IRS mileage rate as that also includes the cost of owning a vehicle.

Your employer should tell you what rate to use and which records they need.

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I’m also self-employed

As self-employed and employee, you need to keep separate records for each. We’ve got you covered with our guide for self-employed and you should also read the rest of this overview for employees. Keep in mind that as a self-employed individual, you should be able to claim mileage deductions for any mileage accrued while conducting business. If you have a vehicle that you only use for your business, not only can you deduct mileage, but all operating expenses for the car. However, if you use the car for both business and private purposes, remember to keep a record of each because you will only be able to deduct miles classified as "business". To understand self-employed tax deductions, please jump over to our article about self-employed mileage tax deductions after you've finished reading this one. 

Reimbursement or allowance arrangement

There are many different ways of making sure employees are compensated for their transportation expenses. One thing that always must happen is making sure that employee expenses (or allowed expenses) match actual payouts. There are also different ways of structuring payouts. Let's have a look at the two most common arrangements:

Mileage allowance

An allowance is paid upfront, typically every month, and the amount is set by your employer. If you happen to get paid more than you spend, it is important to return the excess within a certain amount of time (see accountable plan below).

Sometimes, your employer will give an allowance for parts of your expenses, such as lease payments on the car, and then reimburse other expenses after the fact. That's perfectly fine.

Even if you get an allowance, you and your employer still need to be aware of the IRS' standard mileage rate. If the allowance comes out to a higher reimbursement than the IRS' standard mileage rate would have resulted in, the excess needs to be reported as income and is taxed.

The administrative burden of paying an allowance and accounting for all expenses afterward can be cumbersome. Instead, most companies, as well as the IRS, use a mileage rate. Under a mileage rate reimbursement arrangement, you should be reimbursed a specific rate per mile you drive for business.

Mileage reimbursement

Just like mileage allowance, mileage reimbursement comes in a few different shapes. 

The simplest solution: A standard mileage rate

The simplest arrangement is to use a flat rate per mile driven. It is meant to cover all the expenses related to driving your personal car for business. The IRS rate does exactly that and covers both the costs of owning (fixed costs) and driving (variable costs) your vehicle.

There's a lot to be said for using a standard rate, mostly that it's simple and avoids a fairly big administrative burden.

Be aware that your employer can set any rate they like–they do not have to use the IRS's rate. For rates higher than the IRS' standard mileage rate, the excess will be taxed.

Alternative: FAVR, or Fixed and Variable Rate

A common alternative is FAVR, under which your employer pays:

  • a fixed amount to cover your fixed costs (lease or depreciation, insurance, etc.)
  • a cents-per-mile rate to cover your variable costs (gas, maintenance, oil, etc.)

Be aware that if your employer uses FAVR, you cannot use the IRS' standard mileage rate to cover your variable costs. Also, you still have to be aware of the IRS' standard mileage rate and compare your payouts to the IRS'. Once again, any excess amount is taxed.

You need to meet the rules of an "accountable plan"

To make sure that your reimbursement is tax-free, you need to meet the three rules of an accountable plan as set by the IRS:

  1. Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
  2. You must adequately account to your employer for these expenses within a reasonable period of time.
  3. You must return any excess reimbursement or allowance within a reasonable period of time.

As for 1, this simply means that you must record that each trip happened for a business purpose. See more below on records.

As for 2, new technology makes adequately accounting for your mileage less tedious than it sounds, and it's basically about keeping records of every trip, which includes the destination, the purpose, etc. 

As for 3, a few things must happen within "a reasonable period of time", so let's look at what the IRS considers reasonable.

"Reasonable period of time"

Basically, the IRS sets the standard reaction time to 120 days when it comes to keeping records and payments 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.

For instance, if you stick with monthly payouts and settle with your employer every quarter, making sure any excess is returned within the following months (120 days max), you will qualify for an accountable plan.

Note that none of this covers when you must record trips, which is roughly weekly. Once again, we'll recommend checking out the IRS's own information on keeping records.

How to report your mileage reimbursement

First, we have to introduce the IRS's concept of a nonaccountable plan, which is simply any reimbursement that does not meet the rules of an accountable plan as introduced above.

Now that you know whether your reimbursements are accountable or nonaccountable, you should refer to table 6-1 for the specifics on how to report your mileage reimbursement.

Note that if you meet all the rules for an accountable plan, and your employer included reimbursements in box 1 of your Form W-2, you can ask your employer to correct it.

How to easily track mileage

There are no federal requirements for how you keep track of mileage. Your employer might require you to use a certain method or provide certain records, and they need to inform you of it. A lot of people need to choose for themselves.

Most people use an app to both track their trips and generate mileage reports for them. Depending on the app, it can even take away the pain of forgetting to record a trip. Driversnote is one such app, but we have many competitors in the US, and we recommend you look for one that suits your purpose.

Another alternative might be using spreadsheets, like Excel or Google Sheets, that you can share with your manager and/or accountants. In this case, you might need to take down odometer readings every trip to figure out your mileage accurately.

 

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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.