What You Need to Know About Independent Contractor Mileage Reimbursement

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 can get especially confusing is independent contractor mileage reimbursement. 

That confusion raises a whole host of questions: Do you need to reimburse contractors for mileage reimbursement? If so, would you follow the same process you normally do for employees? What records does your business need to keep track of? 

Have no fear! In this article, we’ll break down everything you need to know about independent contractor mileage reimbursement.

Understanding Independent Contractors and Why Classification Matters

Before you jump into the specifics of independent contractor mileage reimbursement, it’s important that you know the difference between a contractor and an employee. 

An independent contractor:

• Controls their own methods and schedule, with the company defining the outcome of the work
• Is responsible for their own taxes, including self-employment tax 
• Receives no benefits from their employer
• Use their own tools and equipment
• Usually works on a specific project or for a specific time period

An employee:

• Has the how, when, and where of their work controlled by the employer
• Has taxes withheld by the employer
• Eligible for benefits, including health insurance and PTO
• Uses company-owned tools and equipment
• Usually has an ongoing, indefinite relationship with their employer

The IRS takes the matter of worker classification pretty seriously, because depending on whether they’re a contractor or an employee, the way that worker reports compensation differs (Form 1099 for contractors vs. Form W2 for employees). Classification also determines whether a worker is entitled to certain benefits, and whether they’re subject to federal income tax and employment tax withholding. 

While there’s obviously a difference between the two, there are also no hard-and-fast rules that dictate whether a worker is an employee or an independent contractor. Instead, the IRS recommends you determine classification by looking at the degree of control your business has over that worker. You’ll need to ask yourself questions that fall into these three main categories:

• Behavioral: Do you, the employer, control what the worker does and how the worker does their job?
• Financial: Do you control business aspects of the worker’s job (these include things like how the worker is paid, whether expenses are reimbursed, who is responsible for providing tools/supplies, and so on.)
• Type of relationship: Are written contracts or employee type benefits (pension,, insurance, vacation pay, etc.) involved? Will the relationship continue and is the work performed a key aspect of the business?

If you do 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. Early last year, two home healthcare agencies in Louisiana were found to have violated the Fair Labor Standards Act (FLSA) when they misclassified 88 workers as contractors and thus failed to pay them for overtime wages. The United States Department of Labor ended up recovering almost $500,000 in back wages and liquidated damages. That’s an expensive lesson!

Remember that the more control you exercise over a contractor, the greater your exposure. Treat them as an independent worker in practice, not just on paper. 

The Rules Around Independent Contractor Mileage Reimbursement

Independent contractor mileage reimbursement – and, let’s be honest, employee mileage reimbursement in general – can get pretty complex and complicated. Generally, money paid to a contractor is classified as income. However, there are cases when it becomes necessary to reimburse contractors. The IRS provides some leeway in these cases. 

If there are additional driving requirements, for instance, this can call for independent contractor mileage reimbursement outside of what that contractor is being paid to complete the agreed-upon job. That reimbursable travel must be tied directly to the specific project or time period the contractor was hired to work. 

Something else to note when issuing an independent contractor mileage reimbursement: you should only reimburse for work travel if you aren’t reimbursing other expenses incurred such as equipment costs, phone bills or software subscriptions. If you start reimbursing for everything for an independent contractor, they’ll start looking like they’re actually an employee of your business in the eyes of the IRS. Remember that by definition, contractors are independent of your business, and you should treat them as such. 

What About Reporting and Taxes? 

According to the IRS, as a business, you generally don’t have to keep records to prove contractor reimbursements unless the contractor adequately accounts to you for these expenses. In that case, those 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 (so long as they are ordinary and necessary business expenses). However, 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. 

Building a Contractor Reimbursement Policy

You already (hopefully) have a reimbursement policy in place within your business. But what about an independent contractor mileage reimbursement policy? If you don’t have one in place already, it might be time to start writing one. 

You might be tempted to just use your regular employee mileage reimbursement policy for contractors, but it’s better to keep them distinct as much as you can. Contractors are hired for specific projects, and their travel needs will differ from those of regular employees. Using a one-size-fits-all approach to reimbursement here will just lead to compliance gaps and mishandled reimbursements. Having a written policy for contractors also reinforces the separation between them and regular employees, and reduces the appearance of employer control. 

But what should that written policy include?

Define What Is and Isn’t Reimbursable

Start here, by clearly communicating to independent contractors which expenses are not eligible for reimbursement; Will your company reimburse for mileage, tolls, and parking, or a combination? You’ll need to figure out the answer to that question. You’ll also need to decide whether reimbursable mileage includes all mileage related to the project, or just specific instances.

Additionally, it’s vital that you communicate which travel is not eligible for reimbursement. Like with regular mobile employees, personal travel and side trips unrelated to the job do not count as reimbursable mileage. 

Set Documentation Requirements

For independent contractor mileage reimbursement, contractors should submit mileage logs, receipts, or invoices for all travel they submit for reimbursement. That documentation should include:

• Who incurred the expense
• The date and location of the travel
• The work-related purpose for the trip
• The miles driven or cost incurred 

Thorough documentation helps keep reimbursement nontaxable under the rules of an IRS accountable plan. If the reimbursements aren’t accountable, they must be reported on form 1099-NEC.

Establish a Clear Approval and Submission Process

Next, your policy should include everything contractors need to know about submitting expense reports and the expense approval process. Clarify where they fit into your approval hierarchy – they may not report to or get approval from the same manager as regular employees. If there are any other differences between how contractors’ and employees’ expense reports get processed, make sure workers know what they are. You should also define turnaround times for reimbursement, so contractors will know what to expect. 

The Easiest Way To Manage Contractor Mileage Reimbursement 

Managing independent contractors in your workforce requires navigating a different set of rules than you’re used to with regular employees. Mileage reimbursement is one area where those differences really show up. Get the classification wrong, overlook the documentation requirements, or blur the line between contractor and employee, and you’re looking at IRS scrutiny, unexpected penalties, or reimbursements that quietly inflate your costs over time.

But independent contractor mileage reimbursement doesn’t have to be a source of stress. When you have the right policies in place, require proper documentation, and establish a clear approval process, contractor reimbursements become a routine part of doing business instead of a compliance minefield. 

Of course, even the best policy is only as effective as the tools you use to enforce it. Luckily we have the best tools for you with SureMileage, a modern mileage tracking and expense reimbursement solution developed by CompanyMileage.

Instead of requiring workers to manually input odometer readings before and after each work-related trip, SureMileage 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 in a secure system that keeps company data safe. 

With SureMobile, our mobile app, expense reports take just a few minutes for employees or contractors to complete, no matter where they may be. Once submitted, the system moves those reports through an automated 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. 

Another way CompanyMileage helps companies who employ contractors is through our month-to-month contract arrangement, which lets you scale your use of our platform up or down 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 mobile employee or contractor mileage reimbursement, there is no solution simpler than SureMileage. Request a demo today to get started!