If you drive a personal vehicle for business purposes, your employer may offer mileage reimbursement. Essentially, it’s financial coverage for the cost of operating your vehicle for business needs. Prime examples include taking a trip to the supply store or meeting with a client at a coffee shop. In these scenarios, employees are considered “on the clock” even though they are temporarily out of the office.
Since mileage reimbursement can be a great benefit of employment, it’s crucial for employees to understand what expenses fall within the IRS tax guidelines. People often ask us if mileage is the only factor taken into account. What about gas costs? Or what about maintenance and repairs? Most cases, employers don’t take the time or effort to explain the tax advantages of a mileage reimbursement program. Luckily, we’ve got you covered!
In this article, we’ll answer the most frequently asked questions regarding mileage reimbursement in hopes that all employees know what to look for when applying for a new job.
Contrary to the name, mileage reimbursement covers more than actual mileage. In fact, mileage reimbursement programs are pivotal to earning back incurred vehicle expenses from business use. Some of the most common vehicle expenses that receive coverage by employers involve:
It’s also possible to cover expenses that are related to business meals, seminars, and airport travel for business purposes. In general, most business miles have the option to be fully or partially reimbursed, as long as employees and employers keep accurate reports of these costs.
Every year the IRS sets a standard mileage reimbursement rate for the following tax year. For Q1 and Q2 of 2022, the standard mileage rate is 58.5 cents per business mile. Dissimilar to previous tax years, the IRS recently made a change that will impact all eligible taxpayers. As of July 1st through December 31st, 2022, the IRS increased the mileage rate to 62.5 cents per business mile. Therefore, employees have a significant opportunity to earn back accumulated expenses using both of these standard rates on their 2022 tax return.
Employers typically utilize the IRS standard mileage rate to determine mileage reimbursement for employees. However, it’s important to note that the IRS does not oblige employers to offer this type of compensation to W-2 workers. Additionally, employers have the freedom to set any mileage rate they choose. The IRS does not impose a mileage reimbursement law, yet certain states, like California and Massachusetts, enforce minimum requirements.
As an interviewee or new hire, it’s best to ask your employer about mileage reimbursement terms to avoid any discrepancies during tax season. Around this time, you’ll configure your total mileage using a set rate to determine your mileage reimbursement.
In contrast to a car allowance, which is a flat-rate per month, mileage reimbursement is determined by tracking business miles throughout the tax year. At this point, we know you might be wondering: “How do I keep track of mileage every day?”. Employees are busy and don’t want the aggravation of logging miles for every move they make. Likewise, sometimes employees will forget to document a certain business trip, which means less money in their pocket come tax season. Fortunately, that’s not a problem thanks to mileage tracking applications.
With MileIQ, employees can automatically log all business miles each week from the convenience of their smartphone or tablet. While you let the app run in the background of your phone, it will accurately record every business mile you drive, as well as personal drives too. The benefit of a mileage tracking application goes beyond independent tracking. There’s also MileIQ for Teams. This innovative tracking tool allows employers to keep a contemporaneous log of employee miles from one system. As a result, you’ll have in-depth reports of all employee drives should the IRS request an audit.
To calculate your mileage reimbursement, you simply add up the number of business miles traveled (AKA the amount that was logged throughout the tax year) and multiply that number by the IRS standard mileage rate for 2022. If your employer has specified a different mileage rate, you’ll use that amount instead. All in all, mileage reimbursement is relatively easy to compute as long as you maintain sufficient records.
For mileage reimbursement to be considered “tax-free”, an employer must meet the requirements of an accountable plan. According to the IRS, an accountable plan must fulfill the following needs:
As long as your employer accomplishes these feats, the payment you receive will remain tax-free. Yay! That said, if the amount you are reimbursed by your employer exceeds the IRS standard mileage reimbursement rate, then you could be subject to tax for additional income. All things considered, every employee should ask about mileage reimbursement programs and find out the specifics beforehand. Most people would rather be employed by a company that covers gas costs and wear-and-tear versus one that offers no coverage at all.
Want to learn more about mileage reimbursement? Head over to the MileIQ Blog for straightforward tax information regarding small business tips, taxes, and self-employed.