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Mileage reimbursements are one of the trickiest reimbursement methods. Reimbursing employees for business miles traveled in a personal vehicle involves knowing the current IRS mileage reimbursement rates, associated tax rules, and how to keep track of business expenses to stay compliant.
Here's everything you need to know about employee mileage reimbursement, including how to calculate it, tax implications, and possible alternatives.
What is mileage reimbursement?
Mileage reimbursement refers to the process of compensating employees for the cost of gas when they use their personal vehicles for business-related travel.
The mileage reimbursement rate set by the Internal Revenue Service (IRS) covers gas plus wear and tear expenses per mile, factoring in costs like car insurance and depreciation. That’s why it seems high compared to the price of gas.
For example, a salesperson drives 50 miles to speak to a potential client, and the trip only takes $15 worth of gas. The mileage reimbursement will come out to almost double this amount because it considers that the miles driven bring the car closer to needing standard care like oil changes and tire replacements.
How mileage reimbursement works
The IRS sets a standard mileage rate every year. Because of record-high gas prices, their rates for the second half of 2023 are higher than during the beginning of the year. The new rate kicked in on July 1st.
Note that the standard deduction is a guideline and a limit. As an employer, you can choose to reimburse more or less per mile. Amounts reimbursed above the limit are considered taxable income; amounts below the limit run the risk of bringing employee pay under the federal minimum wage.
The legal requirements for mileage reimbursement vary from state to state. For instance, California, Rhode Island, and Illinois have laws mandating mileage reimbursement.
However, many other states follow the federal guidelines set by the IRS, which don’t mandate reimbursement but provide a standard mileage deduction that employers can use as a guideline.
How to calculate mileage reimbursement
To calculate a mileage reimbursement, multiply the number of business miles driven by the current mileage rate set either by the state or the IRS, whichever is applicable.
Suppose you drove 100 miles for business purposes. To calculate your mileage reimbursement, you’d multiply 100 miles by the IRS standard mileage reimbursement rate for 2023, which is 65.5 cents per mile.
100 miles × 0.655 dollars per mile = 65.50 dollars
When to reimburse employees for mileage
Any time an employee or contractor uses their own vehicle for business use, it qualifies for mileage reimbursement. This includes trips to meet with clients, attend events, or complete work-related tasks.
Many businesses choose to reimburse employees monthly. Depending on your number of employees and how frequently they travel, you could also reimburse them immediately after each trip or every quarter.
The amount reimbursed per mile mustn’t surpass the IRS standard mileage rate for any given year. If it does, then the excess amount will be taxed as income.
Are employee mileage reimbursements tax deductible?
Mileage reimbursement requires tracking to be tax deductible. If your business is audited, you'll have to present a mileage log that details the number of miles, reason for the trip, date, and destination for each trip.
Mileage tracking can be done manually or with apps that track a car’s odometer readings.
Challenges with mileage reimbursement
While mileage reimbursements are common, they introduce challenges. One common problem is setting up procedures to log business mileage accurately. This typically means either incurring costs to automate expense-keeping or hiring someone to chase down reports.
The second is over—or under—reimbursing employees. Because car maintenance and gas vary widely by region, the standard mileage rate doesn’t impact all employees equally.
Alternatives: Mileage reimbursement vs. car allowance vs. FAVR
If you’re trying to reduce T&E costs, mileage reimbursement may not be the best option. There are several ways to reimburse car-related expenses, including car allowance, FAVR, and actual cost.
Car allowances add a fixed amount to paychecks meant to cover car maintenance and fuel. Much like mileage reimbursement, car allowances often under-pay some employees while over-paying others.
Unlike mileage reimbursements, which are tax-deductible, car allowances are taxed like payments or salaries. To keep these expenses tax-free, opt for FAVR or actual costs method.
A fixed and variable rate (FAVR) program is a hybrid between car allowances and mileage reimbursement. Employees receive a monthly allowance for fixed costs like insurance and registration, plus a variable-rate reimbursement based on miles driven.
FAVR programs are widespread because they more closely approximate actual vehicle expenses. Just like mileage reimbursement, you must log each business trip with this method.
Finally, the IRS allows businesses to itemize and deduct the actual expenses of owning and operating a vehicle. Rather than reimburse employees with an estimate, actual costs track the total amount spent on a vehicle for business purposes. This eliminates the risk of under—or over—reimbursing employees, as the numbers reflect reality.
Automate business mileage tracking with Ramp
Using the “actual cost” method avoids the headache of tracking mileage reimbursements and mitigates the risk of under—or over—reimbursing employees.
The easiest way to implement the “actual cost” method is by automating it with corporate cards.
Instead of chasing down reimbursement forms and logging every business trip into a spreadsheet, Ramp lets you automate your accounts payable and accounting in real time.
If your T&E policy includes spending limits, you can set controls on your employee business gas cards to make sure every team member spends within company policy. Every business trip registers in a single dashboard—giving you complete visibility into your company’s financials and neat documentation come tax time.