There are plenty of benefits to hiring independent contractors — staffing flexibility, more efficiency, cost savings — but the arrangement isn’t without its challenges. On top of dealing with their fluctuating availability and the limited control you have over their work schedule, your tax obligations are also different for contractors compared to regular employees. One area that is especially confusing is contractor mileage reimbursement. Do you reimburse contractors for mileage? Do you follow the same process you normally do for employees? What records do you need to keep track of as a business? Well, don’t worry. Below we answer all of your burning questions.
Are contractors being classified correctly?
Before you jump into the specifics of issuing reimbursements to your contractors, it’s important to make sure the people you’re hiring are actually contractors. The IRS takes the matter of worker classification pretty seriously, because depending on whether they’re a contractor or an employee, the way compensation is reported differs (Form W-2 vs. Form 1099). It also determines whether a worker is entitled to certain benefits (like medical insurance coverage or retirement plan benefits), and whether they’re subject to federal income tax and employment tax withholding.
To ensure you’re classifying workers correctly, the IRS recommends looking at the degree of control you have over them. There are no hard-and-fast rules that dictate their status. Instead look at the whole relationship: Do you control what the worker does and how the worker does his or her job? Do you control the business aspects of the worker’s job (such as how they’re paid and how the supplies are provided)? Is the work they perform a key aspect of your business? Are there written contracts and/or employee-type benefits? And so on.
If you decide to designate your workers as contractors, just make sure you have sound reasoning behind that decision, because the consequences of worker misclassification can be brutal.
Are contractors eligible for mileage reimbursement?
Typically, anything you pay to independent contractors is considered income, making reimbursements a confusing matter. However, the IRS realizes that there may be circumstances in which it is necessary for you to reimburse contractors, such as for travel or meal expenses, so they do offer some guidance on the issue. If you plan to provide a reimbursement of any kind to contractors — for instance, if the scope of the project changes and requires more travel — it should be stipulated in their contract.
One thing to note when issuing a contractor mileage reimbursement: you should only reimburse for travel expenses if you aren’t reimbursing other expenses incurred such as equipment costs, phone bills or software subscriptions. If you start paying for everything for an independent contractor, it will start looking like they’re actually an employee in the eyes of the IRS. Remember that by definition, contractors are independent of your business, and you should treat them as such.
What records should you keep?
According to the IRS, as a business, you generally don’t have to keep records to prove the reimbursements or allowances you give to contractors for travel unless they adequately account to you for these expenses. These records can be used as proof for a deduction on your own taxes. If contractor mileage reimbursement expenses are not adequately accounted for by the contractor, you can still deduct the amounts as payment for services if they are ordinary and necessary business expenses. If the total of these reimbursements and any other fees winds up being $600 or more during the calendar year, you must file Form 1099-MISC, though.
Should contractor mileage reimbursement be handled differently than your employees’?
When managing your contractors’ mileage reimbursement, it’s important to remember that what is reimbursable for an independent contractor may not be the same as for one of your employees. That’s because contractors are normally hired for a specific project or time period (like the holidays, for example). Therefore, all of their travel may not be related to your business. To avoid overpaying reimbursements, ensure that travel expenses are only related to the specific project or time period they were hired for.
While you need to be more stringent when it comes to issuing a contractor mileage reimbursement, the actual practice of tracking mileage and reporting expenses is not dissimilar from the typical workflow of your employees. If contractors account their travel expenses to you using the right documentation — mileage logs, receipts, invoices or other documents that detail where, when and why the expense was incurred — it will help you separate reimbursement payments from a contractor’s regular compensation.
The Easiest Way To Manage Contractor Mileage Reimbursement
SureMileage is a modern mileage tracking and expense reimbursement solution developed by CompanyMileage. Rather than requiring someone to manually input odometer readings before and after each trip, our system calculates the distance between point A and point B to determine mileage. It’s ideal for anybody with your company who needs to be on the road to visit job sites or run errands, providing an easy-to-use, accurate solution for administering both employee and contractor mileage reimbursement.
After mileage expense reports are submitted — which takes just a few minutes for employees or contractors to complete — SureMileage automatically moves it through your approval workflow. While the final authorization for reimbursement is approved by the manager, all levels can be tailored to meet your needs and conform to your processes. Our platform also integrates with most accounting and payroll software solutions, so issuing reimbursements is fast and straightforward.
A huge benefit for companies who employ contractors is CompanyMileage’s month-to-month contract arrangement. This allows you to scale up or down your use of our platform throughout the year as the size of your workforce fluctuates. Whereas other expense management platforms require annual contracts, we ensure that you only pay for our solution only as much as you use it.
Whether you are trying to make sense of employee or contractor mileage reimbursement, there is no solution simpler than SureMileage. Request a demo today to get started!