Mobile workers must be reimbursed for their work-related travel; and at first blush a business mileage allowance seems like the simplest answer. But there are significant, measurable costs to this approach that can and should be avoided with the right policies and the right tools.
Plenty of companies offer a business mileage allowance to employees who use their personal vehicles for work-related tasks. They typically set a flat monthly rate that is paid to everyone without regard for a number of other variables. Employers can move on to something else and employees can count on, say, $300 a month extra in their paychecks. And therein lies the problem.
A business mileage allowance is taxable because it isn’t made as part of what the Internal Revenue Service considers an accountable plan. The requirements for an accountable plan are familiar but bear repeating:
- The expenses reimbursed have a business connection
- Employees adequately account for the expenses within a reasonable period of time
- Employees return any excess reimbursement within a reasonable period of time.
Remember IRS Publication 15, (Circular E), Employer’s Tax Guide: “Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to the withholding and payment of income, social security, Medicare, and FUTA taxes.”
Say that $300 a month adds $22 to a corporation’s FICA expense and payroll deduction takes $75 from the employee. That means nearly $100 of that $300 payment is lost to taxation!
Other issues with business mileage allowances
Paying employees a flat rate per month to drive their personal vehicles ignores a host of other variables. There’s the cost of operating a vehicle in the place where employees live. A $300 allowance might be just fine in Des Moines, but woefully inadequate in Detroit. Then there’s how much employees actually drive. Those who drive less feel like they are getting something for nothing while those who drive more may feel cheated. Finally, there is the price of gasoline, which is anything but flat.
Despite their significant pitfalls, clear inequities and measurable added costs, organizations adopt business mileage allowances for one obvious reason: They’re simple. Until now there hasn’t been an easy way to create accountable plans that meet IRS requirements and avoid the costs of tracking and verifying the miles employees drive for work.
Focus on expenses incurred, not miles driven
SureMileage, from CompanyMileage, uses a different approach to calculating mileage reimbursement. With SureMileage, employees report each trip’s starting point and destination. The system calculates the driving distance between them. So rather than verifying miles driven, SureMileage calculates expenses to be reimbursed.
SureMileage calculates the travel needed for business purposes and the expense that needs to be reimbursed. Supervisors can review and approve expenses and send them to Accounting for reimbursement. SureMileage simplifies mileage reimbursement and helps employers and employees alike avoid the pitfalls of the mileage allowance.