A business with many employees has, by necessity, a lot of moving parts, and of those parts, the ones related to taxes can get pretty complicated. A major head scratcher can be trying to figure out the intersection between payroll taxes and mileage reimbursement for mobile employees. Is mileage reimbursement subject to payroll taxes?
In this article, we’ll try to clarify this relationship between payroll taxes and mileage reimbursement once and for all and answer any questions you may have.
Before addressing the question ‘is mileage reimbursement subject to payroll taxes?’ it might be helpful to understand what payroll taxes actually are. As the name might suggest, payroll taxes are a form of tax that employers are required to withhold from their employees’ wages or salaries. Employers then remit these taxes to the government on the employees’ behalf. Payroll taxes are used to fund social programs like Social Security, Medicare, and unemployment insurance. The three main components of payroll tax are the employee’s portion of Medicare Tax, their portion of Social Security Tax, and federal income tax withholding.
On the other hand, let’s discuss mileage reimbursement and what it entails. A mileage reimbursement is a type of payment—separate from regular wages—issued by employers to employees for the use of their personal vehicles for business purposes. These reimbursements are intended to compensate employees for costs associated with using personal vehicles for work-related travel, such as maintenance, wear-and-tear, and, of course, fuel costs.
When calculating mileage reimbursement, businesses generally rely on the standard mileage rate that the IRS sets annually. The standard mileage rate is the largest amount per mile that you can reimburse employees while still receiving a full deduction. The IRS determines this rate by evaluating the costs of owning and operating a vehicle in the US. While an assumption exists that this rate is based on gas prices, when determining the mileage rate the IRS actually considers a wide range of costs that affect vehicle owners. These include insurance, registration and fees, and maintenance, among other factors. After all, the biggest cost associated with owning and operating a car is actually gradual depreciation.
In order to issue a legitimate reimbursement payment for work-related travel, employers require employees to submit mileage logs to substantiate their claims.
So, is Mileage Reimbursement Subject to Payroll Taxes?
Well, the short answer is: It depends.
Let’s get into the slightly longer answer, shall we?
Mileage reimbursement can be subject to payroll taxes, depending on how the reimbursement is structured and paid. If the mileage reimbursement is paid by an employer as part of an employee’s regular wages or salary, that money will be subject to payroll taxes such as Social Security, Medicare, and Federal and State Income Tax withholding. However, if an employee is reimbursed for mileage travel, and that money is paid separately from regular wages or salary, as long as it meets requirements set by the IRS, it may be considered a tax-free reimbursement, and thus not subject to payroll taxes.
There are also specific requirements that must be met before a mileage reimbursement payment can be considered tax-free—for example, following an IRS accountable plan. In order to be tax-free, the reimbursement must be for travel related to business, and must be reimbursed at a rate that does not exceed the IRS rate. Most businesses—with a few notable exceptions—don’t have to use this standard rate every year. However, if the rate used by a business is higher than the IRS standard mileage rate, then the excess is taxable, because reimbursements are only tax-free up to the rate set by the IRS.
Businesses also have the option of using the actual expenses method when calculating mileage reimbursement. This method requires totaling up all expenses for a personal vehicle being used for business, figuring out how many miles were used for business purposes, and then calculating a tax deduction based on that. However, most businesses opt to use the standard mileage method for the sake of ease and efficiency.
When submitting a mileage reimbursement, using the standard mileage option, the employee in question must have substantiated the expenses with adequate records in the form of a mileage log. While the IRS doesn’t police what format you use, they require that your mileage records must be able to prove the amount of miles driven for each business-related trip, the date and time of each trip taken, the destination for each trip, and what business-related purpose the trip served.
Make Sure You’re Managing Mileage Reimbursement the Right Way with CompanyMileage
So: Is mileage reimbursement subject to payroll taxes? Well, sometimes. But at CompanyMileage we do our best to make sure that reimbursement payments that pass through our system are never subject to taxation, and we achieve this by optimizing and automating every step of the process for our users. Our software solution, SureMileage, uses point-to-point calculations based on the starting and ending points of each trip to calculate the cost of reimbursement. Using this method, CompanyMileage ensures accurate mileage tracking while avoiding inflated numbers from non-work related travel.
SureMileage is also designed to be as easy-to-use as possible, so you can meet IRS requirements and secure deductions without any headaches. Our SureMobile app makes it simple for employees to log trips right from their smartphones; all they need to do is take a few minutes out of their workdays to organize their trips, take photos of any relevant receipts, and submit expense reports for their managers to review.
Once submitted, SureMileage automatically moves reports through each step in your company’s approval workflow. Plus our system easily integrates with accounting and payroll software to make sure reimbursement for approved expense requests is timely.
A more effective mileage reimbursement process is right around the corner. Contact CompanyMileage to schedule a demo and learn more!