The standard mileage rate the Internal Revenue Service sets for each year is no doubt an important metric. For employees that drive their personal vehicles for their jobs – and the employers who pay them – this rate is integral to their reimbursement program. With the exception of some situations and states, companies aren’t mandated to use the standard mileage rate. For those companies that have a choice in the matter, should they be reimbursing mileage at the federal IRS rate?
The Purpose of the IRS Standard Mileage Rate
For tax purposes, the IRS announces this rate (for businesses in 2019, it is 58 cents per mile) that employers can use to issue reimbursements or employees can use to claim a deduction during tax season. Employees can either claim the deduction or receive a reimbursement, but they can’t have both. This rate gives businesses a reasonable metric for reimbursements that is based on research, and the IRS can ensure they aren’t frivolously wasting taxpayer dollars. They don’t just pull this number out of a hat, though.
How the IRS Determines the Standard Mileage Rate
Since the IRS needs to announce the standard rate for reimbursing mileage prior to the beginning of each year, it is based on predictions for the projected cost of owning a vehicle in the US. While fuel cost is given a lot of weight in the analysis, the third-party study covers a lot of factors that affect the cost of a vehicle: maintenance, depreciation, insurance, registration and inspection fees and other miscellaneous expenses such as tires and repairs.
It’s important to remember that the standard mileage rate they decide upon is an average for the year. Fuel costs, for example, can fluctuate dramatically in the course of a year, so while this rate is based on a quantitative analysis of vehicle costs, it can never be entirely accurate. For that reason, taxpayers can opt to calculate their actual costs of operating a vehicle for that year,
When it is Applicable to use the IRS Rate
The IRS actually puts out three rates: one for businesses, one for medical or moving purposes and one for nonprofits and charitable organizations. With the exception of your daily commute, the standard mileage rate can apply to any travel made for work purposes. If employees are traveling for work regularly, tasks such as traveling to meet a client, going to an offsite location for training or a conference or running work-related errands at different business location are all eligible for reimbursement.
How the IRS Rate Affects Your Business and Employees
The standard mileage rate is the maximum for which businesses can reimburse for miles driven before the payment is considered taxable wages. This means that if you reimburse at a rate higher than that set by the IRS, employees have to claim the excess as wages. If you reimburse at a rate lower than the IRS rate, they can claim up to the maximum amount as a deduction on their taxes. As long as all goes according to plan, reimbursing mileage using the standard mileage rate works out well for your business. It’s far easier than calculating actual costs and employees appreciate being paid fairly for their jobs.
However, unlike the federal mileage rate, the costs of owning a vehicle are not the same everywhere in the US. Across the country, costs for expenditures such as gas, insurance and maintenance can vary dramatically. Gas prices – which receive a lot of weight during cost analysis – depend on global controls and fluctuate daily. Owning and operating a vehicle in California is likely far more expensive than in Arkansas, yet employers in both states are reimbursing mileage at the same rate.
Moreover, accurately predicting average vehicle costs for the next year is almost impossible. The IRS wants to get the number as close as possible. If it’s too high, they waste tax dollars in deductions. If it’s too low, employees are either underpaid for work-related travel or companies waste money itemizing expenses to prove why they are paying above the federal rate.
Is Reimbursing Mileage with This Rate Good for Business?
There are some states with laws mandating companies reimburse their employees at the IRS mileage rate, and if you have employees working at or near the minimum wage, reimbursing at the standard rate is a safe bet. Most companies have more freedom to design their reimbursement program in a way that’s best for their business, though.
Having a reimbursement program of any kind is good for your business. It can be a great recruitment and retention tool to offer reimbursement for use of their personal vehicles. Employees feel more satisfied when they don’t feel like you’re exploiting them, and this also improves job performance. And, while they could always keep a mileage log on their own and claim a deduction on their taxes, people typically prefer to see their money returned to them throughout the year instead of all at once. Your employees may be completely unaware of these reimbursement rules, though.
The rate the IRS provides isn’t always a perfect fit for your business. However, it is the easiest. Choosing to use their metric makes tax season a lot less complicated. Employees only need to keep a mileage log, submit regular travel expense reports throughout the year and make sure they returned any excess payments. In exchange for simplicity, you give up accuracy in some cases. Fuel efficiency, the age of your employees’ vehicles and gas price in your region can make your reimbursement too low or even too high.
If you don’t want to take the easy way, what happens if you choose to start reimbursing mileage at a different rate? If you’ve crunched some numbers and decided that it is best for your business to begin reimbursing mileage at a higher rate, all you need to do is prove to the IRS why this is an eligible business expense. They may require you to provide detailed documentation that demonstrates why reimbursing at this higher rate is necessary.
If you decide to reimburse at a lower rate, it’s a typically an easy process. You don’t need to provide any itemized documentation proving your decision, and you can deduct these amounts as business expenses. Keep in mind that there are certain instances where businesses can’t reimburse at a lower rate. Be sure to educate yourself on reimbursement law before you make any changes to how you are reimbursing mileage to your employees.
CompanyMileage is Always Good for Business
No matter how much you choose to reimburse for mileage at your company, an expense tracking software such as SureMileage by CompanyMileage will improve your reimbursement program. It automates mileage tracking for your employees and ensures that travel reimbursements are processed accurately and quickly. We save you time and resources, so you can get back to work.
Unlike recording odometer readings or using a GPS system, our system uses point to point trip calculations to provide accurate mileage each time. Mileage padding and unauthorized side-trips – which plague any reimbursement process – are taken care of, and employees have an easier way to submit expense reports. In most cases, it only takes a few minutes out of their day to submit trips for reimbursement. SureMileage also integrates with all major accounting and payroll systems, guaranteeing a smooth approval process.
As you reconsider your current processes for reimbursing mileage, keep in mind the benefits a software such as SureMileage can bring you. Our clients are able to save 25% on average by ensuring they only pay for the miles driven. With us you can maintain higher mileage reimbursement rates knowing that we are managing the miles paid. Request a demo with CompanyMileage today, and strengthen your reimbursement program.