Is employee mileage reimbursement taxable?

If your organization requires business travel and you don’t have the budget to provide company cars, you can reimburse your employees for the miles they travel for work in their personal vehicles.

Mileage reimbursement doesn’t just take financial pressure off your employees. It has tax benefits for employers and shows your employees you care about them, which boosts engagement and retention.

The IRS sets regulations regarding mileage reimbursement. So before you add this perk to your benefits package, you need to know how to offer it compliantly. This guide explains everything you need to know about mileage reimbursement, including how you can provide comprehensive transportation benefits to your employees.

Learn about other fringe benefits your staff will love in our complete guide

What is mileage reimbursement?

Mileage reimbursement is when an employer reimburses an employee for expenses incurred while driving their personal vehicle for business purposes. The IRS mandates that eligible mileage expenses should be “ordinary,” or standard within the business’s industry, and “necessary,” meaning they should be reasonable and not extravagant.

In addition to reimbursing employees for mileage, you can choose to offer reimbursement for all expenses a worker incurs to maintain their vehicle if it’s often driven for work. For example, you can reimburse fuel costs, routine maintenance, car insurance premiums, registration, and more.

The employer decides who’s eligible for reimbursement, what costs are covered, and the how payment is structured. You should outline the details in your reimbursement policy so it’s clear to employees. But before you get started, you should double-check federal and state regulations.

While the Fair Labor Standards Act (FLSA) doesn’t require employers to reimburse workers for mileage, organizations of all sizes must reimburse their employees if the expense reduces their net salary to less than minimum wage.

Some states require employers to reimburse their employees for work-related expenses, and under-reimbursing a worker may be illegal, depending on where you live. So check with your HR and legal teams to ensure you meet all obligations to stay compliant.

How does mileage reimbursement work?

Before your employees can get reimbursed for their mileage expenses, they need to track the miles they drive for work. GPS mileage tracker apps are handy because they automatically track routes. Employees using these apps can provide you with accurate expense reports detailing each trip’s time and date, business purpose, starting point and destination, and total distance traveled.

This information is required, and you must maintain error-free mileage logbooks to process reimbursement payments under IRS guidelines¹.

The IRS determines the standard mileage reimbursement rate on an annual basis. Many employers follow the standard rate, but you can offer a lower rate if it’s better for your budget.

The IRS federal mileage rate² for 2023 is:

• 65.5 cents per mile for business purposes
• According to the IRS, business purposes are defined as driving between two places of work, whether permanent or temporary. Some examples are traveling between two work locations, meeting with clients off-site, visiting customers or vendors, and running errands on behalf of the business.
• 22 cents per mile for medical and moving purposes
• 14 cents per mile for charitable purposes

To calculate a reimbursement, multiply the standard mileage rate by the number of miles an employee has driven over a certain period of time (typically a pay period). For example, if an employee drove 50 miles for business purposes over a two-week period, their reimbursement would be $32.75.

If you want to reimburse your employees for more than mileage expenses, you can use the fixed and variable rate (FAVR) plan³.

FAVR reimburses employees for all actual expenses incurred by using a personal vehicle for business purposes. It allows you to offer a flat amount of money to pay for fixed costs, like car insurance, and a movable rate to cover variable costs like repairs.

With a FAVR plan, each employee’s reimbursement is based on their vehicle type and geographic location. The variable cents-per-mile rate periodically shifts as the local fuel prices fluctuate.

Popular expenses that are eligible under a FAVR reimbursement plan include:

• Fuel costs
• Car insurance and registration fees
• Tollbooth fees
• Parking
• Maintenance costs and repairs
• Lease payments
• Car loan interest and taxes
• Vehicle depreciation costs

To be eligible for a FAVR plan, your company must have a minimum of five employees traveling more than 5,000 miles a year for business purposes. If you don’t meet these requirements, your best option is to use the standard mileage rate.

Lastly, if an employee uses their car for personal and business purposes, they need to separate the miles they spent business driving to get reimbursed accurately. They can do this by calculating the percentage of business miles traveled and multiplying it by the costs.

To illustrate, if an employee drives 1,000 miles total in a month, and 750 miles are business-related, you can reimburse them for 75% of all car expenses.

Once the mileage expenses are submitted and reviewed, you can approve them for reimbursement. The amount can be added to your employees’ paychecks or sent out as a separate payment. Remember to keep adequate records in case of an IRS audit.

Is mileage reimbursement taxable?

If you’re offering employees a fixed monthly allowance for car expenses, they will only have to pay taxes on the allowance amount that wasn’t used on mileage. That’s because the IRS considers mileage reimbursement tax-free if made under certain conditions.

An employee’s mileage reimbursement is tax-free if:

• They qualify for reimbursement and receive the IRS standard mileage rate or less.
• The reimbursement is part of an accountable plan.

To have an accountable plan, the reimbursement must be for services completed on behalf of the business. All mileage documentation should be appropriately recorded, and if there’s any excess reimbursement given, the employees must return it in a reasonable amount of time.

Additionally, independent contractors can deduct business mileage expenses based on the IRS standard mileage rate from their taxes, and employers can write off reimbursements to employees as business expenses.

If you don’t have an accountable plan, employees are subject to taxation in the following situations:

• The reimbursement an employee receives exceeds the IRS standard mileage rate.
• An employee didn’t return any excess reimbursement within a reasonable period of time.
• The reimbursement was issued without appropriate documentation.

Simply put, if you use the IRS standard mileage rate, your employees' reimbursements will be tax-free. If you want to reimburse them for other vehicle expenses, use the FAVR plan. Any reimbursements made under the FAVR plan, both fixed and variable, are tax-free as they’re considered an accountable plan under IRS regulations.

How you can reimburse your employees for their mileage and other transportation expenses

If you don’t qualify for FAVR but want to reimburse your employees for more than just mileage, you should consider offering them a transportation stipend.

A transportation stipend is a fixed amount of money offered to employees to pay for work-related travel costs. You can either give the stipend money upfront on a monthly or annual basis or use a reimbursement model.

If you want to offer reimbursements, you can request your employees track and submit their mileage and proof of other travel costs and reimburse them afterward.

Unlike standard mileage reimbursement programs, stipends are essentially grossing up wages, so they act as taxable income for employees. They’re also subject to payroll taxes for employers.

However, they have no eligibility requirements and fewer regulations, so all employers are eligible and can customize their stipend to cover whatever travel-related expenses they want—even if they’re just commuting to the office.

In addition to common vehicle expenses and mileage, your transportation stipend could cover the costs associated with company travel, such as:

• Commuting expenses, including bus, train, ferry, and light rail travel
• Lodging and meal costs
• Airfare
• Mileage reimbursements
• Parking fees
• Rental car or rideshare expenses
• Gas

Offering a comprehensive transportation stipend is beneficial for both employers and employees. Employers gain the trust of their staff, attract greater talent by having a robust benefits package, lower turnover, and boost employee satisfaction.

Not only are stipends beneficial for employees with long commutes or who travel for work frequently, but their flexibility and added financial security can help them save a significant amount of money every year—especially during times of inflation which can impact the cost of travel.

Administrating a stipend doesn’t have to be complicated. With benefits administration software, you can easily manage your stipend, approve reimbursements, and store documentation quickly and easily.

Because the IRS regulates standard mileage reimbursements, stipends are an excellent way to cover all your employees' transportation expenses while saving you the hassle of meeting time-consuming IRS requirements.

Conclusion

Companies with employees that frequently travel for business have more options than ever to show their support. By offering your workers mileage reimbursements, you show your appreciation for their efforts and willingness to use their car to meet your business’s goals.

But even your employees who only commute to work can benefit from financial assistance. With a transportation stipend, you can reimburse all your employees for their work-related travel expenses, including mileage reimbursement, mass transit passes, fuel costs, and more.

If you’re interested in personalized travel benefits, PeopleKeep can help! Schedule a call with us today, and we’ll get you started.

1. https://www.irs.gov/taxtopics/tc305

2. https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2023-business-use-increases-3-cents-per-mile

3. https://www.irs.gov/irb/2010-51_IRB#:~:text=SECTION%204.%20BUSINESS%20STANDARD%20MILEAGE%20RATE