It’s often cost-effective for an employer to ask employees to drive their own cars when at work, rather than invest in company-owned vehicles. However, this imposes a cost on the employee. Organizations frequently pay mileage reimbursements to attract and keep good workers. Following Internal Revenue Service guidelines for reimbursing vehicle operating costs based on mileage provides both the employer and the employee with significant tax advantages.
Mileage Reimbursement Basics
Each year, the IRS publishes an updated standard rate for tax-deductible mileage reimbursement. The rate reflects the average cost of operating motor vehicles like cars, vans and SUVs. For example, the standard rate for 2015 is 57.5 cents per mile. The IRS sets the rate at a level that covers not only gasoline, but normal operating costs, including insurance, licenses and maintenance. Employers can track actual vehicle expenses but generally don’t, since using the standard rate makes the extra recordkeeping unnecessary. The standard rate does not cover items like parking or toll fees. Employers can reimburse these costs as business expenses, but they must be handled as separate items.
Allowable Business Travel
Employers can only pay tax-exempt mileage reimbursements for work-related driving. This means an employee may not do personal errands and still claim the trip as a business expense. For example, a trip to meet with clients is deductible, but taking a side trip to make a personal bank deposit is not. In addition, driving between work and home each day is not deductible travel. Sometimes employers prepay mileage, especially for long business trips. When this is done, the employee must return any unused amount.
Tracking Business Trips
IRS mileage reimbursement documentation requirements are simple when the standard rate is used. This is because the standard rate covers all normal operating costs, so an employer isn’t required to keep track of costs such as gas and repairs. An employee must provide a record of work-related travel. They usually keep a mileage log and should submit it for reimbursement on a regular schedule. Each log entry has to include the initial and ending odometer readings. Entries must also provide a brief description of the trip’s purpose and destination.
Reimbursement and Taxes
If an employer pays an employee more than the allowed amount, the excess is taxable compensation and must go on the employee’s W-2 as such. Otherwise, mileage reimbursement is a deductible business expense for the employer. The employee has no tax liability for reimbursement up to the standard rate, and the money is not reported as compensation on the W-2. When employers choose to pay a smaller amount, employees can write off the difference on their tax returns.