When Is Mileage Reimbursement for Employees Considered Taxable Wages?

Mileage reimbursement for employees is good for everyone. They get money back and avoid having to pay taxes on it while the employer gets to deduct the expense from its corporate tax return. But there are situations in which mileage reimbursement to employees does have tax implications for both sides.

Calculating Mileage Reimbursement for Employees

Following the relevant mileage reimbursement rules and using the right tools will help avoid those taxing situations, which are:

No accountable plan.

For reimbursement payments to be exempt from payroll and income taxes, the payments must be made under an accountable plan. To be deemed accountable, an employer’s reimbursement plan must satisfy three rules. First, the expenses reimbursed must have a business connection. Second, the employee must adequately account for the expenses within a reasonable period of time. Third, the employee must return any excess reimbursement within a reasonable period of time.

According to the IRS Publication 15, (Circular E), Employer’s Tax Guide, “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.”

Expenses not “ordinary and necessary.”

IRS Publication 535, Business Expenses, says, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

No clear business purpose for meal and entertainment expenses.

Meal and entertainment expenses are only reimbursable if it can be demonstrated they had a clear business purpose.

Standard mileage reimbursement rate is exceeded.

While it is permitted to reimburse employees at any mileage rate, reimbursements in excess of the IRS standard rate are considered taxable income.

Not surprisingly, the IRS demands from employees what it calls adequate accounting. It says, “Your employees must adequately account to you for their travel, meals, and entertainment expenses. They must give you documentary evidence of their travel, mileage, and other employee business expenses. This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day planner, or similar record in which the employee entered each expense at or near the time the expense was incurred.”

Collecting and verifying that documentation requires time and money, and its accuracy is still not guaranteed.

SureMileage, from CompanyMileage, uses a different approach to calculating mileage reimbursement for employees. With SureMileage, employees report each trip’s starting point and destination and the system calculates the driving distance between them. So rather than verifying miles that were driven, SureMileage calculates expenses to be reimbursed.

SureMileage proactively calculates travel for business purposes and the expense that needs to be reimbursed. Supervisors can review and approve expenses and send them to Accounting for reimbursement.

SureMileage simplifies mileage reimbursement and helps employers and employees alike avoid unwanted contributions to the federal treasury.