Is mileage reimbursement taxable?
As much as it would be nice to have a simple yes or no answer, you should know by now that nothing related to taxes is ever that simple. The very concept of a mileage reimbursement is intended to be non-taxable for a business, but there are several caveats to that statement. How have you structured your expense management program? What mileage rate are you reimbursing at? Are you following an accountable plan? More importantly, can you prove that you’re following an accountable plan and keeping detailed records?
So, is mileage reimbursement taxable? It depends. It will be helpful for you if we back up and start from the beginning.
What Constitutes a Mileage Reimbursement
Simply put, a mileage reimbursement is a payment made to employees by their employer when they travel for work using their own vehicles. With a few exceptions, such as California- or Massachusetts-based companies, issuing a reimbursement for miles driven is usually optional. However, if your employees often travel for work using their own cars, then implementing a mileage reimbursement program can be a mutually beneficial opportunity. Employees get the added perk of receiving compensation for their work-related travel, and if done correctly, companies won’t be taxed for these payments.
The Internal Revenue Service (IRS) actually provides guidance for issuing mileage reimbursements. You can either calculate actual mileage expenses or use a mileage rate. Using millage rate is much easier to implement and therefore much more common among companies. However, simply reimbursing mileage at a mileage rate does not make your payments non-taxable.
The Standard Mileage Rate
To help you reimburse mileage, the IRS sets a standard mileage rate each year. In the world of mileage reimbursements, this rate is akin to the gold standard. It’s based on an annual study of the fixed and variable costs of owning and operating an automobile in the year ahead. These costs include fuel prices, maintenance costs, insurance premiums, inspection and registration fees, regular wear and tear, depreciation and other miscellaneous costs. In 2021, the standard mileage rate for business is $0.56/business mile.
The IRS makes this rate available so businesses will more easily be able to calculate the amount of a mileage reimbursement. In other words, if an employee drives 100 miles, you multiply that number by 0.56 to find the reimbursement amount of $56.00.
It’s important to remember that this rate is in most cases completely optional. You may choose to reimburse your employees at a mileage rate that is higher or lower than this rate. Since the IRS rate is based on a national, annual average, it can’t be spot on for everyone, so it may actually be smarter to set your own rate in some situations. You should know that if an employer reimburses mileage at a rate that exceeds the IRS rate for businesses, then the difference between the amount you paid and the amount that would have been paid if you used the IRS rate will be considered taxable income.
So, is mileage reimbursement taxable if you reimburse at a rate lower than the IRS standard mileage rate? It should be non-taxable, as long as you’re abiding by the rules of an accountable plan.
An accountable plan is the last piece of the puzzle. It is a set of expense management guidelines created by the IRS to ensure that you’re handling reimbursement payments in a way that complies with their standards. In order for a mileage reimbursement to be accountable and therefore non-taxable, it must meet this criteria:
- Business-Related: The business use of the mileage being reimbursed must be demonstrated to be both ordinary and necessary. Ordinary means it’s commonly accepted in your business or trade, and necessary means it’s helpful to your business or trade. Accepted business-related travel includes visiting a job site, running business errands or meeting clients.
- Substantiation: Each employee must keep an up-to-date log of each business trip in order to record date, destination, mileage and purpose. They must also provide this information to the employer in a reasonable time period to receive a reimbursement.
- Returning Excess Amounts: When an employer pays an employee an amount that exceeds that which was incurred or spent, the employee must return it within a reasonable time period (usually 60 days).
If you don’t have an accountable plan in place, reimbursement payments will be made under a nonaccountable plan. According to the IRS, “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.”
Therefore, even if you reimburse at or below the IRS mileage rate, but you don’t keep appropriate records to prove the business use of a trip, the mileage reported or whether excess amounts were returned to you by employees, then mileage reimbursements will be taxed. If you follow all the rules the IRS has created regarding reimbursement payments, you should be in the clear, though!
Is Mileage Reimbursement Taxable With CompanyMileage?
We’d like to make sure that no expense reimbursement payment that passes through our system is taxable. To achieve this, we track and automate every step of the mileage reimbursement process for our customers. Our solution, SureMileage, calculates the cost of each reimbursement based on the mileage traveled between the starting and ending points of a trip. By relying on point-to-point calculations rather than odometer readings, we ensure more accurate mileage tracking uninflated by non work-related travel.
Using our SureMobile app, employees only need a moment to check in at each location throughout the workday. Before they clock out and head home, it only takes them a few minutes to submit their trips in our system for approval. Once submitted, supervisors are automatically notified to approve their mileage for reimbursement. The approval workflow is completely configurable based on organizational structure and needs. We even integrate with your account and payroll software, so it’s always a simple and fast process to issue reimbursements.
When you use SureMileage, you’ll have a full auditable record of every trip an employee takes including the time and date, the starting location, the destination, the mileage and any additional notes an employee provides. You can even flag certain behaviors or set daily per diems in our system.
If you’re worried about meeting all the rules of non-taxable mileage reimbursement, a mileage expense management system like CompanyMileage will save you many, many headaches. Schedule a demo with us today to learn more!