When it comes to successfully running a business, everything begins and ends with taxes; filing them, paying them, and when possible, not paying them. For example, consider the question: is reimbursement for travel work subject to payroll taxes? This isn’t a ridiculous question to ask. You probably process employee wages at the same time you process reimbursement payments, and both payments likely require some of the same procedures.
All that being said, the answer is…it depends. In this article, we’ll examine payroll taxes and mileage reimbursement best practices to settle the issue once and for all.
Understanding Payroll Taxes
Before considering the question, “is reimbursement for travel work subject to payroll taxes?” First we must consider payroll taxes themselves. Payroll taxes are a type of tax that employers are required by law to withhold from the wages or salaries of the employees on their payroll – hence the name. Employers then remit these taxes to the government on behalf of their employees. These payroll taxes are used to fund social programs (such as Medicare, Social Security and unemployment insurance) and have three main components: Medicare Tax, Social Security Tax, and federal income tax withholding.
Mileage Reimbursement Payments
Mileage reimbursement on the other hand, is a payment separate from an employee’s regular wages, reimbursing them for the use of their personal vehicle for business travel. These payments, issued by the employer, are meant to compensate the worker for costs associated with using their own car for work, such as for maintenance, standard wear-and-tear, and the cost of refueling.
When calculating reimbursement payments for employees, businesses generally use the standard mileage rate, which is set by the IRS every year based on studies of the cumulative costs of owning and operating a vehicle. In most cases this rate is optional.
Is Reimbursement for Travel Work Subject to Payroll Taxes?
Well, no, not necessarily…as long as you follow IRS guidelines.
In most states (California and Massachusetts-based companies being the exceptions), reimbursing employees for their work-related mileage is optional. However, when handled correctly, mileage reimbursement payments are not considered employee wages by the IRS. If an employee’s reimbursement payment is paid separately from their regular salary or wages, it may be considered a tax-free reimbursement, and therefore not subject to payroll taxes.
However, if you really want to ensure that reimbursement for travel worker isn’t subject to payroll taxes, then you’ll need to abide by the IRS’s rules for an accountable plan. This is a set of guidelines for expense management set by the IRS that ensures that businesses are meeting their standards when issuing mileage reimbursement payments. For reimbursement to be accountable (non-taxable), businesses must follow these criteria:
Business-Related: The mileage being reimbursed must be demonstrably ordinary and necessary, meaning that it must be commonly accepted in the employee’s business/trade, and helpful to that business or trade.
Substantiation: Employees must keep an up-to-date log of each business trip, recording the date, destination, mileage and purpose of the trip in question. Employees must also provide this information within a reasonable time period.
Returning Excess Amounts: If an employer reimburses an employee an amount that exceeds what was incurred or spent by the employee, that employee must return the excess amount within a reasonable period of time.
Additionally, if you opt to reimburse employees at a rate higher than the standard mileage rate, the excess payments will be considered wages and taxed as such. For example, the rate in 2024 is 65.5 cents per business mile. If you decide to reimburse your employees at 70 cents per mile for 100 miles, $4.50 of the reimbursement amount will be taxed while the remaining $65.50 will not be taxed.
Through smart business practices (and the IRS), non-taxable mileage reimbursement is possible! But what are the best ways to keep employee mileage accountable? Here are some tips.
What’s in a Log?
Keeping an up-to-date mileage log is a huge factor in keeping employee mileage compliant with the IRS accountable plan. While the magnanimous overlords at the Internal Revenue Service leave the format of the log itself up to the business, they take the content of those logs very seriously.
Always ensure that the information in employees’ mileage logs is timely, accurate and thorough. Employees should keep their mileage logs in real time – post-dating entries is a no-go, as it increases the likelihood of fabricated or estimated mileage counts.
In that vein, keep mileage logs clear of mathematical mishaps! If you have your employees calculating their work travel by manually totaling up their odometer readings, this opens you up to the possibility of errors, miscalculations, and other inaccuracies that may cause the IRS to reject the log.
Is it Deductible?
It’s important to remember that not all mileage an employee travels in their day-to-day life is going to be tax deductible. For example, mileage traveled as part of a commute is not typically considered work-related travel. Other travel, such as non-business related detours, errands, and personal appointments, is not eligible for reimbursement and should not be included in a mileage log for the IRS.
Remember, Go Low, Not High
Because the mileage rate set by the IRS is based on annual, national averages, it won’t be perfect in all locations, so some businesses may choose to set a higher or lower rate as needed. Just keep in mind that if you reimburse employees at a mileage rate higher than that of the standard rate set by the IRS, the difference in those amounts is considered taxable income.
Manage Mileage Reimbursement the Right Way with CompanyMileage
So, is reimbursement for travel work subject to payroll taxes? The answer is ‘sometimes,’ but at CompanyMileage we’ll do everything in our power to make sure you get that deduction! Our automated solution, SureMileage, utilizes point-to-point calculation based on the start and end points of each trip to calculate mileage for employee reimbursement. This ensures the most accurate mileage tracking possible, while avoiding the chance of inflated numbers or including non-work related travel in the count.
SureMileage (as well as our other products, SureMobile and SureExpense) are designed to be as simple and intuitive as possible, so you can meet IRS accountable plan requirements without adding any stress to your already-busy workload. Using our SureMobile app, employees can log trips right from their smartphones. They only need to take a few minutes every day to organize their trips, photograph receipts, and submit expense reports for manager approval.
Once submitted, these reports move through a configurable workflow that can integrate with major payroll and accounting systems, so every step in the process is as smooth and fast as possible.
An easy, tax-efficient mileage reimbursement process is possible, and CompanyMileage is here to help you achieve it. Contact us to schedule a demo today!