Mileage reimbursements are one of the trickiest T&E 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.
Despite being widespread, this isn’t the only method to cover travel-related costs for employees and contractors. Corporate cards and/or trip allowances are often more straightforward.
Still, there are certain cases where mileage reimbursements make sense.
Here's everything businesses need to know about employee mileage reimbursement, including benefits, downsides, tax implications and possible alternatives.
What is mileage reimbursement?
Mileage reimbursement is a method of keeping track of T&E related to using a personal vehicle for business purposes.
Employee mileage reimbursements fall under the “T” umbrella by covering vehicle expenses when traveling for business.
The IRS mileage reimbursement rate is meant to cover not only gas, but also wear and tear expenses per mile. This is why rates seem high compared to the cost of gas.
For example, let’s say a salesperson drives 50 miles to speak to a potential client and the trip only takes $15 worth of gasoline. The mileage reimbursement will come out to almost double this amount because it takes into consideration that the miles driven bring the car closer to needing standard care like oil changes and tire replacements.
On a federal level, business owners are not legally required to reimburse employees for vehicle usage unless those costs put them below the minimum wage.
Still, if you don’t learn how to create a fair travel and expense policy, it opens a world of risk. This is especially true because the laws around mileage reimbursement vary by state. Even if you manage to avoid legal implications, it’s likely that recruitment and retention will suffer.
IRS standard mileage reimbursement rates for 2022
The IRS sets a standard mileage rate every year. Because of record-high gas prices, their rates for the second half of 2022 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 taxed as income; amounts below the limit run the risk of bringing employee pay under the federal minimum wage.
How mileage reimbursement works
Mileage reimbursement requires tracking to be tax deductible. If you are audited, your business must present a mileage log that details the number of miles, reason for the trip, date and destination for each trip. This can be done manually or with apps that track a car’s odometer readings.
How to calculate mileage reimbursement
To calculate a mileage reimbursement, multiply the number of miles driven by the mileage reimbursement rate (typically standard mileage rate set by the IRS).
When to reimburse employees for mileage
Any time an employee or contractor uses their personal 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 on a quarterly basis. This is up to your discretion.
The amount reimbursed per mile must not 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?
As long as you accurately and consistently track employee mileage reimbursement, it will be deducted as an expense on business taxes.
Challenges with mileage reimbursement
While mileage reimbursements are common, they introduce challenges. One big hurdle is setting strong procedures to accurately log business trips. 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 so widely by region, the standard mileage rate does not equally impact all employees.
Alternatives: Mileage reimbursement vs car allowance vs FAVR
If you’re looking into how 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 costs.
Car allowances work by adding a fixed amount to paychecks that are 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 & variable rate (FAVR) program is a hybrid between car allowances and mileage reimbursement. Employees receive a lower fixed monthly allowance for car maintenance plus a variable rate reimbursement based on miles driven.
FAVR programs are widespread because they more closely approximate the costs of operating a vehicle. Just like mileage reimbursement, you are required to log each business trip with this method.
Finally, the IRS allows businesses to itemize and deduct the actual costs 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 the reality.
Save time and empower employees by avoiding mileage reimbursement entirely
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 automating it with corporate cards.
Ramp for Travel makes it simple to order both physical and virtual cards for your team, advancing the finance automation of your organization. Instead of chasing down reimbursement forms and logging every business trip into a spreadsheet, use Ramp cards to automate bill pay and accounting in real time.
If your T&E includes spending limits, you can add automatic spend controls to make sure every team member spends within company policy. Every business trip registers in a single dashboard - giving you full visibility into your company spending and neat documentation come tax time.