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Comprehensive Guide to Mileage Reimbursement Rules for Employees and Employers

MileIQ Team

Mileage reimbursement is a form of compensation businesses provide their employees for using personal vehicles at work. As the name suggests, reimbursements are based on distance traveled and can be completely tax-free if calculated using the standard mileage rate provided by the Internal Revenue Service. The rate is updated annually to reflect the ever-changing gas prices, insurance, depreciation, and other car maintenance costs. 

In addition to mileage rates, the IRS specifies what is considered business-related travel and can be reimbursed without paying income tax. For example, daily commuting from home to the regular workplace is not counted as business-related travel. 

While mileage reimbursements aren’t mandatory on a federal level, they’re considered a standard procedure, especially in professions that require frequent driving. They’re a crucial mechanism for employers to keep their staff happy and fairly compensated for their business travels. 

Understanding Mileage Reimbursement Rules

Employee mileage reimbursement is the process of compensating employees for work-related driving using their personal vehicles. This type of reimbursement is not mandatory in most states, but in many industries, it’s considered a standard procedure that helps maintain employee satisfaction through fair compensation. The only states that require businesses to reimburse employees for using their vehicles for work are California, Illinois, and Massachusetts. 

For reimbursements to be tax-free, companies need to use standard mileage rates provided by the IRS. In 2024, it means that companies can issue tax-free reimbursements at the maximum rate of 67 cents per mile. 

Any vehicle reimbursement higher than that is considered taxable income. Still, companies sometimes may choose to offer higher reimbursement rates based on factors like:

  • Local fuel and maintenance costs
  • Difficult driving conditions
  • Industry standards

Therefore, a well-crafted mileage reimbursement policy guarantees accurate travel payment for employees and significantly contributes to attracting and retaining staff.

It’s also worth mentioning that to keep employees happy, some companies choose to implement different compensation methods like a car allowance. In that case, employees have more freedom around using the benefit since it’s not dependent on mileage. 

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What Are Employee Reimbursement Methods ?

Mileage-based reimbursements are quite common. They usually result in fair compensation, and they’re quite easy to implement, especially with the help of a mileage-tracking app like MileIQ. 

However, other methods may be more suitable for companies and employees, depending on the specific situation. 

For example, the actual expenses method is considered more accurate and can result in higher compensation, but it requires much more detailed recordkeeping and accounting for all vehicle-related expenses. 

Then, there’s the fixed and variable rate (FAVR) method, which combines the mileage-based approach and the actual expense method. 

A slightly less popular method is providing a car allowance. It’s a fixed benefit added to salary, which can be spent entirely according to the employee’s preferences. Remember, that some employers might have usage guidelines that need to be followed.

IRS Mileage Reimbursement Rates

Before we talk about the current rates, it’s necessary to point out that the standard rates set by the IRS only specify the maximum rate at which businesses can reimburse employees for mileage tax-free. In other words, reimbursement payments under or at the IRS limit do not count toward an employee's taxable income.

Because there’s no federal law enforcing mileage reimbursements, companies in most states can set their own rates that can be lower or higher than the standard. Any amount exceeding the standard rate has to be considered a taxable income. 

For 2024, the standard mileage rate for business use is set at 67 cents per mile, which means it increased by 1.5 cents compared to the previous year. As always, the IRS determined the rate through an annual study of the fixed and variable costs of operating a vehicle, taking into account factors like:

  • depreciation
  • insurance
  • repairs
  • tires
  • maintenance
  • fuel prices

Mileage Allowance

Another method of mileage reimbursement is mileage allowance. This is a fixed amount given to employees each month to cover their driving expenses. It’s probably the easiest method of vehicle reimbursement for employers. 

However, it is fully taxable, so it may not be the most optimal method from a fiscal standpoint. On top of that, it’s also the most inaccurate form of compensation. Depending on their vehicle use every month, employees usually will be reimbursed either too generously or not sufficiently enough. 

Still, it’s often appreciated by employees as it gives them complete freedom in terms of how exactly they spend their allowance. 

FAVR (Fixed and Variable Rate)

The Fixed and Variable Rate (FAVR) is a unique reimbursement method that combines a flat monthly allowance with a variable rate per mile driven. This method is sanctioned by the IRS, allowing companies to reimburse employees tax-free for business driving using their personal vehicles.

FAVR takes into account both the fixed costs (depreciation, insurance, license fees) and variable costs (fuel, maintenance, repairs) of operating a vehicle. One of the main reasons for its introduction was to allow companies to build their own reimbursement systems that reflect specific costs and conditions in different geographic areas. 

Legal Requirements for Mileage Reimbursement

Only three states require companies to reimburse employees for their use of personal vehicles: Illinois, California, and Massachusetts. Everywhere else, mileage reimbursements are optional, so businesses can create their own policies as long as they align with the IRS regulations. 

However, there are general rules for employee reimbursement in the Fair Labor Standards Act. For example, if an employee’s business expenses (such as gas) effectively reduce their income below the federal minimum wage, they must be reimbursed to match the difference. 

You can find more reimbursement regulations in the Tax Cuts and Jobs Act. Since its introduction in 2017, employees can’t claim unreimbursed expenses as tax deductions. 

Calculating Mileage Reimbursements

The formula for calculating mileage reimbursement is quite simple. 

But before you go through the numbers, you should make sure that you track and categorize all your business miles properly throughout the year. There’s quite a wide range of tools that can help you track and prepare documentation for the IRS.

While it’s still possible to keep records in a notebook or a simple spreadsheet, it’s much more convenient to use a mobile tracking app that helps you with all the steps of the process, from mileage tracking to calculating and preparing documents for your tax return. 

But if you prefer the traditional way, here’s the formula for calculating mileage reimbursement:

business miles driven * mileage rate = reimbursement

While calculating, remember that not all companies use the IRS standard mileage rates. It’s possible that your employer has a different rate, but if the reimbursements are still based on mileage, the formula remains the same. 

Documenting Mileage for Reimbursement

In addition to mileage, the IRS requires a few other details to allow tax-free reimbursements. Records about each trip have to include:

  • purpose of the trip
  • starting and ending point
  • date
  • odometer readings

Any missing information may lead to an IRS audit and costly penalties, so that’s another reason to keep your records accurate. Be sure to hold on to any relevant documentation for at least three years — which is typically how far back the IRS checks records during an audit.

Best Practices for Employers

The most important part for employers is choosing the right reimbursement method that will be easy to manage and fair for employees. The basic mileage-based method can work out just fine, but there are situations in which it may be insufficient. For example, if a profession requires not only driving but also renting vehicles, it may be better to use the FAVR method or car allowance. 

Communication is another crucial aspect. The mileage reimbursement policy has to be perfectly clear to ensure that employees understand what to expect when it comes to mileage reimbursement.

It’s also important to leave room for discussion and potential optimization. Just like standard mileage rates are updated yearly, employees may ask for the policy update if the rate doesn’t reflect growing prices of gas and other vehicle-related expenses. 

Automating Mileage Tracking

Mileage tracking software and apps, like MileIQ, make employee reimbursements much more manageable by automating the most tedious parts of the process.. 

Trips can be tracked with just a few clicks, and reports for the IRS can be easily generated at the end of the year. And on top of that, you don’t need to worry about misplacing any crucial documents.

Common Questions and Concerns

There’s always a risk of an IRS audit if there’s any missing documentation or miscalculation, so businesses need to pay close attention to all the records backing tax-free reimbursements. They may review the mileage log and sometimes even ask for supporting documentation proving the purpose of a trip. 

That’s why, as an employee, you should make sure to record each business-related trip, including all the relevant information about purpose and date. That way, you’ll have the necessary proof for the IRS and your employer.

Frequently Asked Questions

How does mileage reimbursement work for employers?

Employers can reimburse employees tax-free for business mileage at a maximum rate of 67 cents per mile (in 2024). This reimbursement is not considered a benefit and should not be included in employees' income. However if an employer chooses a higher reimbursement rate, any amounts over the standard rate count toward taxable income.

Should mileage be reimbursed through payroll?

Mileage reimbursement through payroll is not federally mandated, but some states like California, Illinois, and Massachusetts have laws requiring it. Therefore, you should check the specific state laws to determine if mileage should be reimbursed through payroll.

How is the IRS standard mileage rate determined?

The IRS standard mileage rate is determined through an annual study of the fixed and variable costs of operating an automobile, including factors like depreciation, insurance, repairs, tires, maintenance, and fuel. This rate is then set for the upcoming year based on the findings of the study.

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