Organizations that have moved from mileage reimbursement to car allowances or trip fees very often say they gave up on mileage reimbursement because they had no way to manage the reimbursement process. Most of them fail to realize that car allowances and trip fees introduce two serious problems into an equation that is much more simply solved by mileage reimbursement.
The Taxable Income Problem. Many organizations paying car allowances and trip fees don’t understand that these payments are taxable income. The IRS permits tax-free payments for mileage if it is per mile (subject to maximum rate of 54 cents per mile) or actual costs: gasoline, etc. However, payments – car allowances or flat fees per trip – are considered wages for Department of Labor purposes.
Imagine a scenario in which an employer pays employees a car allowance of $250 a month. That requires annual payments of $250.17 for Social Security taxes and $58.51 for Medicare taxes. That doesn’t include the employee’s taxes: $807.02 in income tax, $169.47 for Social Security taxes and $58.51 in Medicare taxes. Add it up and it’s $1,343.68 in taxes. Organizations with 100 employees are looking at $134,367.30 in tax payments by the business and its employees.
|Federal Income Tax||$807.02|
|Social Security Tax||$169.47|
|Social Security Tax||$250.17|
|What if you have 100 employees?||$134,367.50|
When an organization does not tax these payments the IRS looks to the employer for all taxes due. What does that mean? Well, the payments are considered net payments so the employer is liable for grossing up the payments and paying Social Security, Medicare (employee and employer) as well as income tax.
The Labor Rules Problem. Let’s look at a second scenario in which an employer properly taxes the car allowances or trip fees. But remember, these are wages for Department of Labor purposes. So if your employee works overtime then these payments become part of the employee wage base.
Let’s look at the same $250-per-month reimbursement, which equates to $3,000 a year. If an employee averages 3 hours of overtime a week, there is an underpayment of overtime for the year of $324.52. So for every 10 employees, the organization is out $3200!
|Monthly Car Allowance||$250|
|Normal Annual Hours||$2080|
|Overtime Wage Assumption||1.44|
|Overtime Premium (1.5x)||2.16|
|Underpayment of overtime assumping employee works 3 hours O/T per week||$324.52|
|What if you have 100 employees?||$32451.92|
Mileage reimbursement just makes sense
The reality is the IRS provides a method for reimbursing employees tax-free and free from Department of Labor and Workers Compensation insurance. Why would any organization want to subject themselves or their employees to additional taxes, penalties and interest when there is a service that can manage the whole process?
SureMileage from CompanyMileage lets employees report their starting point and destination and the system calculates the driving distance between them. So rather than verifying the miles that were driven, SureMileage calculates the expenses to be reimbursed. Because it is point-to-point reimbursement, personal mileage is eliminated from the reimbursement equation, as are home commutes.
SureMileage also has an integrated address book – corporate and personal – and every location is given a name. Supervisors can review and approve expenses and send them to Accounting for reimbursement.
Mileage reimbursement has always been the right approach. What it needed what the right tool to make it more manageable. SureMileage is that tool.