The IRS standard mileage rate is intended to cover all the costs associated with operating a vehicle for business purposes. This includes wear and tear on the car as well as gas expenses.
The question that many employers and employees have is whether gas costs are covered in the “mileage rate”. The answer is, yes.
If an employer reimburses mileage, he should not also reimburse for gas or for times when the car is in the shop. Mileage reimbursement is intended to cover all of those expenses.
Of course, an employer can reimburse whatever he or she chooses and if this just covers the cost of gas, that is fine (in most states). If an employer does not reimburse the full IRS rate, then employees can deduct that portion on their taxes. Keep in mind, though, that mileage can only be deducted if it exceeds 2% of the employee’s AGI. So if the employee isn’t driving much, it’s probably best that the employer reimburses.
How the IRS Sets the Rate and What It Means
“The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile.”
If you break down the mileage rate, it makes a lot of sense and appears to be very fair. Seeing the rate used in a real world example helps to understand why the rate was chosen and how to use the funds to cover business vehicle costs.
Example: Break down of these expenses over the course of one year
Let’s say a sales employee drives 100 miles a day for business purposes and her car gets 29 miles per gallon. Then each day she will need roughly 3 and a half gallons of gas per day to cover the business trips. The national average for regular gasoline is currently $3.52 (March 2014). So this means that the sales lady will be spending about $12.30 per day on gasoline. Based on the 2014 IRS mileage rate of 56 cents per mile, the sales lady will be getting $56 per day for business mileage expenses – quite a bit more than her gas costs! After she spends $12.30 on gas, she will have $43.70 remaining.
Let’s say she puts this into a savings account, rather than spending it with her paycheck. If she works five days per week and drive 100 miles each day, then every week she will be putting $218.50 away for car expenses. And every month she is putting $947 away. With just one month’s mileage reimbursement, she can afford to put gas in the car and replace her fuel pump and timing belt. The next month she may need windshield wipers, an oil change, a new headlight, and a serpentine belt in addition to gasoline. No problem. Her mileage reimbursement has her covered.
Now, this might be a typical scenario for local sales people driving a newer car with good gas mileage. Pizza delivery drivers may drive about this much but don’t usually have nice cars with great gas mileage. Some types of drivers drive a lot more than this but most probably a little less. If you want to calculate the gas and repairs amounts for yourself then plug in the numbers like this:
Find: (number of miles driven per day)/(miles per gallon your car gets)
Multiply that by the gas cost in your area. Multiply this by how many days you work per day.
That gives you your weekly gas cost. Now multiply the IRS rate of 56 cents per mile by how many miles you drive in a week. This is your total reimbursement.
Finally, take the reimbursement minus the gas cost. This gives you your excess that you can use for repairs. I hope it’s enough to change your breaks!
Save That Mileage Reimbursement!
You can see that mileage reimbursement should cover or even exceed a normal car’s wear and tear. But this money must be saved and not spent if it is to come in handy for the employee’s car. Spending mileage reimbursement is too easy for an employee to do when it comes along with the regular paycheck, but if a business car is to be easily maintained, it should instead be saved.
Should You Calculate Costs Manually or Use the IRS Rate?
“Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.”
As you can see, though, from the above scenario, the standard mileage rate is more than sufficient in most cases. If you happen to drive a lot in a car getting only 17 to 18 miles per gallon, you might want to consider calculating costs manually. It can’t hurt to save receipts because it will show you clearly whether your delivery driving or sales job is worth it in the end.
Tracking Mileage Easily
No matter how much an employer decides to reimburse her employees, she can easily track the mileage with Timesheets.com. The employee simply adds the miles to his expense sheet and the system calculates the total dollars to be paid based on the mileage amount that the administrator sets up.