The IRS sets the employee mileage reimbursement rate for employees who drive their personal vehicles for work purposes (they also set rates for charitable, medical, and moving purposes). The rate is intended to be a guideline for employers and a tax deduction opportunity for employees.
What sometimes confuses people about this is that the IRS sets an employee mileage reimbursement rate, but the FLSA does not mandate reimbursement by the employer. So what’s the deal? Do employers have to reimburse employees? And what rate should they use?
Do Employers Have to Reimburse for Mileage?
Many employers think they have to reimburse mileage but, in reality, they probably don’t. Employers are free to reimburse more or less than the IRS rate as long their state doesn’t have its own requirements and as long as any lack of reimbursement does not cause the employee’s wages to fall below minimum wage.
Should the Employer Reimburse?
- Employees appreciate it – Even though it’s legal to reimburse less than the IRS rate, employees don’t usually appreciate it. Gas costs and repairs are out of pocket expense. If employees get paid back for those expenses only once a year (at tax time), this may put a lot of strain on them.
- Employee retention – If employees feel they are being treated fairly, they’ll usually stick around longer.
- Can’t claim the deduction – Most low wage employees don’t itemize deductions and can’t claim the deduction.
- It’s most common – Most businesses do reimburse employees. A BLR Survey found that 73% of respondents actually reimbursed employees the max IRS rate.
How Do Employees Get Reimbursed?
Even if you don’t reimburse your employees, those that itemize deductions and drive a significant amount can recover the costs on their taxes.
The amount the employer does not reimburse is the amount employees can deduct on their taxes. If employers reimburse more, however, which is perfectly acceptable, employees have to claim this mileage excess as wages on their taxes.
Note: Mileage can only be deducted if it exceeds 2% of the tax payer’s AGI. This means that employees who don’t drive a considerable amount can’t take the deduction. Additionally, employees who don’t itemize deductions also can’t take the deduction. If employees can’t claim the deduction on their taxes and employers don’t reimburse, they have no way of getting reimbursed!
Calculate and Track Employee Mileage
Calculating mileage payments and keeping track of mileage is a challenge that online tracking apps help manage.
Reimbursing mileage with expense software like Timesheets.com allows employers to use whatever rate they like. After the employer sets up the rate in the system, employees enter their miles, and the software calculates the total. Then, at the end of the year, employees can run reports on paid expenses to calculate their expected tax deductions.
Employees need to keep track of their mileage for tax purposes. Apps like these help employees do that. If not using an app, they should be sure to keep all the necessary records on their mileage log.