Federal law doesn’t mandate the reimbursement of mileage expenses. However, employers and employees can use the IRS mileage rate, which the IRS posts each year, as a guide for reimbursement.
While it is ultimately up the employer what to reimburse, it’s probably better to reimburse the the exact IRS mileage rate. Here’s why:
Reimbursing the Full IRS Mileage Rate
1. Gas costs
Adding up all the costs associated with driving can be a hassle. Thankfully, Gas costs are covered in the rate the IRS sets for mileage reimbursement and so you don’t have to add up your employee’s gas receipts. Just pay employees based on their mileage. You can either map their route on Google Maps and use that mileage as your guide or use the mileage your employee gives you. Employees need to be keeping records of their mileage driven for work anyway in a log book or mileage recording app.
2. Unclaimed tax deductions
While employees can deduct the mileage that employers don’t reimburse, they can only do this if they are itemizing their deductions. Most low wage workers that don’t own property probably aren’t itemizing their deductions. This means that if the employer doesn’t reimburse the full rate, there really is no way for the employee to recover those lost expenses. This may be fine if the chosen rate covers gas and the employee doesn’t drive enough to really put any wear and tear on his own vehicle, but if the employee doesn’t itemize deductions and does drive a lot for work, he’s going to be out a chunk of change.
3. Employee retention
Reimbursing the full mileage rate is good for employee retention and morale. Losing good workers is costly and employing unhappy workers is also costly so it’s good to try and avoid that. Employees feel valued when they don’t feel like they’re being used or shorted. Additionally, sales people and delivery drivers can have a big impact on the success of a business since they come face to face with customers and are responsible for inventory. Making those employees happy.
4. Minimum wage
If employees’ out-of-pocket business expenses cause them to drop below the minimum wage, the employer will be in violation of minimum wage laws. When employees kickback cash to their employers in this way, the expenses must not be so great that after subtracting those expenses from their wages, the final product falls below the minimum wage. “Wages must be paid free and clear of impermissible deductions – such as the costs of operating the vehicle or traveling on the road – that would reduce pay below the federal minimum.”-DOL
5. State laws
If employees are in California or other states with their own reimbursement laws, then, well, you have to reimburse the full IRS rate anyway.
Reimbursing More Than the IRS Rate
Reimbursing more than the IRS rate is not very common but some employers give a fixed mileage allowance for employees who drive their personal vehicles. Employees should keep track of their mileage anyway so that they know if the mileage reimbursement wasn’t sufficient or if it was excessive. The IRS counts excess mileage reimbursement as wages and so the employee would need to claim that excess on his taxes.
Reimbursing Less Than the IRS Rate
I’ll just reiterate point 2 here. While employees can deduct the mileage that employers don’t reimburse, they can only do this if they are itemizing their deductions. Most low wage workers that don’t own property probably aren’t itemizing their deductions. This means that if the employer doesn’t reimburse the full rate, there really is no way for the employee to recover those lost expenses.