Is Mileage Reimbursement Taxable Income?

When is mileage reimbursement taxed as income?

There are two common scenarios where mileage reimbursement can become taxable.

1. Mileage reimbursement above the standard rate

The IRS has a standard mileage reimbursement rate for businesses (usually updated every year). As long as you reimburse for mileage at or below the standard rate, you won’t need to worry about deducting taxes. 

But sometimes companies may want to reimburse at a higher rate to make up for cost of living increases, or higher fuel and maintenance costs in your area. While it can be a goodwill gesture, it also means that any amount reimbursed over the standard rate will need to be taxed as regular wages. 

For example, the IRS standard rate is $0.67/mile in 2024 and you decide to reimburse your team at $0.80/mile. That means if someone on your team drove 5,000 miles per work that year, their taxable mileage calculation would look like this:

$0.67 x 5,000 = $3,350 of tax-free mileage

$0.80 x 5,000 = $4,000 in actual mileage reimbursement

$4,000 - $3,350 = $650

You’d need to deduct income taxes on the $650 difference for that employee. 

As you can see, these calculations are technically not difficult, but having to do this for every person on your team can get time consuming. One way to speed up the process is to use a mileage tracking software. For example, MileIQ for Teams allows you to set custom rates and automatically calculates reimbursement amounts — no spreadsheet formulas in sight.

2. Lump sum reimbursement 

In some cases, businesses may not feel like dealing with mileage at all. In this case, they provide employees with a lump sum to cover all business-related driving expenses. 

If you go this route, you can simply add whatever amount you feel is appropriate and in line with real-life driving expenses of your employees to their paycheck. This amount will need to be taxed just like regular income.

Business miles vs commuting miles

The IRS considers commuting to be a personal expense,  so commute mileage is taxable. If you reimburse employees for driving between home and their regular workplace, then you’ll need to tax those mileage reimbursements as regular income. 

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TIP: Traveling between home and a “temporary workplace” (anywhere someone expects to work less than a year) is not considered a commute and can be reimbursed. For example, a remote worker visiting company headquarters once a quarter can likely get a tax-free mileage reimbursement for those drives.

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Of course, separating commute mileage from reimbursable tax-free mileage just makes running payroll more stressful than it already is. That’s why some businesses choose to exclude commute mileage entirely and reimburse employees for commuting separately. 

For example, businesses using MileIQ for Teams can set a team-wide commute distance which gets automatically deducted from certain drives, and then reimburse employees with a taxable commute benefit. This means their mileage reports only contain drives they are planning to reimburse — a huge time saver. 

Is mileage reimbursement taxed as income?

You need to meet certain IRS requirements to offer non-taxable mileage reimbursements. 

• Employee mileage must be business-related: The reimbursement must be directly related to drives for work-related tasks. For instance, traveling to meet clients, attending work-related meetings, or transporting goods for the company.
  
  
• You have proof that mileage was for work: Your drivers and you need to document every work trip in order for the reimbursement to be tax free. That includes dates, destinations, purpose of the trip, and number of miles driven. Without this documentation, the reimbursement may be considered taxable income, and you may be penalized for underpaying taxes during an audit. 

TIP: The MileIQ app tracks routes, addresses, and dates automatically. All drivers need to do is tap to send a report.

You’ll also need to be mindful of any over-reimbursements. If you end up paying mileage reimbursements above the standard rate or fail to tax a mileage advance, you’ll need to ask your team to return the excess money or tax it on their next paycheck. 

As you see, mileage reimbursements can be either taxable or non-taxable, depending on how they’re handled according to IRS guidelines. 

The ultimate goal is to provide fair compensation to employees for the costs of using their own vehicles for work. It’s the easiest way to ensure employees aren't financially burdened by work-related travel, which helps maintain job satisfaction and a positive working relationship.