Unless you want to give money away to the IRS, expense reimbursements shouldn’t be taxed. When employees pay for expenses out of their pocket, they use their taxed income and so taxing the reimbursements for those expenses is like double taxing that money. You don’t want to do that. Your employees definitely don’t want you to do that.
There is no Federal law mandating the reimbursement of mileage expenses but the IRS does set a rate that employers and employees can use as a guide. This leaves a little room for confusion though. How much should an employer reimburse? While employers may have valid reasons for reimbursing more or less, I would argue that it’s better to reimburse the full rate. Here’s why:
The question of whether employers must reimburse their employees for work related expenses comes up a lot. The answer is not cut and dry, however. The FLSA does not require employers to reimburse for mileage or other expenses but some states, such as California, do. It is the responsibility of the employer to be familiar with state laws.
The Fair Labor Standards Act does not require that employers reimburse for mileage. This may seem a little strange – if an employee makes business-related purchases, then the business should pay for them, right? Well, the FLSA does not require it. When employees pay for work related expenses (as long as those expenses don’t bring the employee’s wage under the minimum) then the employer has no obligation to pay them back.
Except, that is, in California.
The IRS Standard Mileage Rate is the rate provided by the IRS for mileage reimbursement for business use of a personal vehicle. In 2017, the rate is 53.5 cents per mile. The rate is a guideline based on average gas prices and average wear and tear on a vehicle (gas reimbursement is a part of this rate).
Some people want to know if they can reimburse less than the standard rate. The answer is yes. Others want to know if they can reimburse more. The answer is also yes.
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.
The purpose of the IRS Standard Mileage Rate is not to require that employers reimburse employees for mileage at that rate (or at all, in fact), but to give the employee a rate for mileage deductions at tax time, as well as to give employers a reasonable reimbursement rate based on current research.
The rate gives employees a chance to get compensated either through payment by the employer or as a deduction for business related mileage on their taxes.
You don’t actually have to reimburse your employees for mileage expenses according to federal regulations. Of course, if you don’t, employees may not want to drive anywhere for you, because it’s expensive and it causes wear and tear on the vehicle. But if you decide, for whatever reason, that you don’t want to reimburse your employees for mileage, then rest assured, you won’t be held liable by Department of Labor for not reimbursing. (Some states have their own laws and do require reimbursement.)
The IRS sets mileage reimbursement rates 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 a mileage reimbursement rate, but the FLSA does not mandate reimbursement by the employer. So what’s the deal? Do employers have to reimburse and what rate should they use?