Is driving a part of your job? If you drive a company vehicle, it’s pretty easy to understand who pays for the mileage, fuel, and even the wear and tear on the vehicle. If you drive your own car to travel for or perform tasks for your employer, things can get a bit more confusing — and it’s crucial to understand the role of mileage reimbursements in your situation.
A mileage reimbursement is money your employer pays you back to cover the expenses you incurred using your own vehicle for business purposes. While that sounds simple enough, it’s important to understand how to receive these payments and how to handle them at tax time. Here’s what you need to know to get started.
What Are Mileage Reimbursements?
In some businesses, there may be times when employees use their cars to travel or perform some type of service, such as delivering a local rush order, on behalf of their job. When this happens, your employer uses a mileage reimbursement to estimate how much the trip costs you so it can pay you back for those expenses.
You earn a mileage reimbursement because you use your personal property to complete a work task. The reimbursement is calculated based on the number of miles you drive. If driving for the company is a regular part of your job, then gas, car maintenance and mileage reimbursements are important considerations for your personal budget.
How Mileage Reimbursements Work
The IRS and General Services Administration publish annually updated rate suggestions, but individual mileage rates are private agreements between an employee and their employer. There’s no required minimum mileage reimbursement rate. Some states have laws that make mileage reimbursements a requirement any time an employee travels for work. Outside of these states, there are no federal laws related to mileage reimbursement.
In some cases, minimum wage laws factor into mileage reimbursements. When using a personal car is part of the job, the employer is required to pay mileage if the expense of driving for work makes the employee’s pay fall below minimum wage.
How to Track and Calculate Mileage Reimbursements
Most mileage reimbursements are calculated as cents per mile, and many employers have logs to make the calculation easier. Some businesses even use apps to track mileage. If your employer doesn’t have one, you can create a record for yourself.
You’ll need to record the date, the reason for your travel, and your mileage at the beginning and end of the trip. Subtract your starting miles from your ending miles to calculate how many miles the trip took. Then, multiply the number of miles by the number of cents your employer pays per mile to arrive at your reimbursement amount.
It’s important to understand the particular calculation and reimbursement policies your employer has established. Some businesses standardize mileage tracking by using the calculations on mapping websites. There may be deadlines and other processes you’ll use to submit your mileage so your employer can reimburse you for it.
Is Your Mileage Reimbursement Fair?
To understand if your mileage reimbursement rate is fair, consider the big-picture cost of driving your vehicle for work. While it’s true that every mile you drive consumes gas, putting miles on your car has wider-reaching effects, too.
Higher mileage depreciates your car’s value. Annual mileage also factors into your car insurance premium. Car maintenance, such as oil changes, is based on miles you’ve driven. If you drive hundreds of miles each month for work, you need to consider the added costs of more frequent maintenance and quicker depreciation to determine if your employer’s reimbursement actually covers these amounts.
Calculate how many reimbursed miles you drove for work in the last year. Divide that number by the mileage when you take your car in for maintenance. Would the reimbursement you earned cover the cost of maintenance? How many more times would your work miles require additional car servicing?
If you know your car’s miles per gallon, calculate how much gas last year’s reimbursed mileage cost you. Then calculate your total mileage reimbursement for the year. You can determine if your mileage reimbursement is fair by calculating whether it covers maintenance and gas, the two most easily trackable costs.
What’s fair may also depend largely on your area’s cost of living. Although mileage reimbursement rates aren’t often published to the public, you can find rates for similar local companies on employer review websites. If you have professional peers, you can even ask members of your network about their reimbursements.
Are Mileage Reimbursements Taxable?
Mileage reimbursements are not taxable if your employer has an established accountable plan for reimbursements. Your employer is more likely to put you on an accountable plan if travel is a regular part of your job. An accountable plan carefully follows IRS standards.
In an accountable plan, the business gives you money before you travel. The amount is based on a quarterly estimate of your travel expenses, a rate per mil or a per diem rate. During your travel, you’re responsible for recording the costs of the trip. At the end of the trip, there’s an accounting between what you spent and what you were paid. If you spent less than your employer paid you, you must return the difference. Because this reimbursement method only covers your expenses and you never profit from it, it doesn’t count as taxable income.
Mileage reimbursements are taxable if they’re disbursed as part of a non-accountable plan. Although it’s separate from the wage or salary you earn for working, the mileage reimbursement is money you earn from your employer as a result of working. The IRS treats it just like regular income.
Any money you receive throughout the year for mileage reimbursements will appear on your W-2. Just as employers include money earned from bonuses, tips and commissions along with an employee’s base salary or wages on a W-2, mileage reimbursements are another category of annual income.
Your employer should tell you if you’re participating in an accountable plan. Under a non-accountable plan, you usually have no responsibility to maintain receipts related to travel. Instead, you have to keep up with your mileage, and your employer pays you the agreed-upon rate per mile.
In certain circumstances, your mileage may qualify as a tax deduction. The standard rate the IRS recognizes is 58.5 cents per mile in 2022. If you count this mileage as a deduction, the total impact on the taxes you owe from mileage cancels itself out as long as your employer doesn’t pay more than the IRS rate.
Mileage reimbursement has a standard calculation, but the rates, tracking policies and reimbursement schedules depend on the business. Make sure you understand the policies for your job to get the correct rate.