Reimbursing employees accurately for the business mileage they put on their personal vehicles is no joke. The consequences of not doing so range from increased T&E expenses to legal action. What does your company need to know when paying employees for business miles driven? Let’s dig into the IRS mileage reimbursement rules that impact your vehicle program.
The IRS has a few major rules when it comes to mileage reimbursement. First, there’s the guideline known as the IRS mileage standard. Second is specific to the particulars of ensuring mileage logs are IRS compliant. Third, there’s commute mileage. And finally, there’s fixed and variable rate reimbursement. We’ll get into the details of each below.
Every year, the IRS announces the new IRS mileage standard. In 2023, that rate is 67 cents. This rate is a guideline to ensure companies are reimbursing their employees. The rate they arrive at takes a number of factors into account, using data from costs of the prior year. Most companies just reimburse their employees’ mileage at this rate if they have a mileage reimbursement or cent-per-mile (CPM) vehicle program. However, companies can reimburse at a number below this rate. Now, what happens if they reimburse at a rate higher than the year’s mileage rate?
Let’s say your company has been reimbursing at a rate of 68 cents per mile in 2023. Because that payment is 1 cent more than the IRS mileage standard, the IRS considers that “additional income” and taxes it. Ultimately, that means the company is paying more and the employee is receiving less.
When it comes to mileage, the IRS requires mileage logs. Moreover, the mileage logs must meet the IRS standards for compliance. The required information to meet the IRS mileage reimbursement rules is fairly simple. For each trip, employees must record:
There’s a lot of room for error when driving employees recording this information manually. Mileage logs that don’t capture the required information are not compliant and can result in an audit. Luckily, there are mileage apps that automate this process. Automated mileage tracking also significantly reduces the issue of mileage fraud.
Every day, employees wake up in the morning and drive their car to work. Shouldn’t that be considered business mileage? According to IRS mileage reimbursement rules, the money spent on getting to and from work is a commuting expense. Commuting expenses cannot be deducted, so there would be no reason to create an IRS compliant mileage log for the trip to or from work.
There are some circumstances that complicate the situation. For example, what if your office is your home? In that event, when you drive from your home to another place for business, that is considered business mileage. Or, if you have no regular place of work and no office in your home, the first location you drive to do business is considered a commute, so the miles driven are not reimbursable. The drive from the last business you visit to your home at the end of the day is also considered a commute.
While the other pieces here apply specifically to rules established by the IRS around mileage reimbursement, this stretches outside that definition. Fixed and variable rate reimbursement is an IRS-approved methodology for paying employees for business mileage on a personal vehicle. It’s even part of the tax code. And, it’s the only IRS-approved reimbursement method. But even with all this going for it, it isn’t as common as it should be. So we’re going to dig into what it is and why the IRS approves of it, beginning with fixed costs.
A fixed and variable rate reimbursement is different from other reimbursement programs in two major ways. First, as per the name, it considers the fixed and variable costs of vehicle ownership. Fixed costs, the costs that change with less frequency, include insurance and title and registration of a vehicle. Variable costs, the costs that can shift even from day to day, include gas, tires and maintenance. Vehicle programs that don’t consider these elements aren’t providing driving employees with accurate reimbursements. And accuracy is where the second major difference comes into play.
With a mileage reimbursement, or a car allowance, companies apply one sum, or an average, across their driving base. And that’s hardly fair. Things don’t cost the same everywhere. Take gas as an example. The cost to fill your tank on one side of the state could be anywhere from $0.05 to $1.00 or more different to the other side of the state. FAVR is the only program that considers the costs of the driving employee specific to their location. No more averages, no more “you get what everyone else is getting.” Mobile workers are reimbursed what they deserve. Pretty neat, right?
We talk about FAVR like it’s a favorite child here. And, if we’re being honest, it is. But that doesn’t mean it works for every company. As a general rule, FAVR only really works with a mobile workforce that drives a minimum of 5,000 miles each year. As good as it looks, it’s simply overkill for other companies with smaller mobile workforces. Interested in exploring FAVR further?
You might think if FAVR has an ideal company profile, surely mileage reimbursement does too. Well, you’d be right. Mileage reimbursements best serve companies with a smaller pool of driving employees that drive no more than 5,000 miles each year in a range no bigger than their state or general region. If that that sound like your company, then mileage reimbursement is the answer. If it doesn’t, then you should look into other vehicle programs. There are options out there that will better fit the needs of your company and more accurately reimburses driving employees.
Knowing the IRS rules around mileage reimbursement is important. Companies that don’t pay attention to the amount they can reimburse, what trips should be reimbursed and the essentials of mileage logs expose themselves to audit, increased expenses and mileage fraud. There’s more to know about mileage reimbursement than the IRS rules surrounding it. Learn more about the cents-per-mile vehicle program.