Mileage reimbursement programs are essential for businesses whose employees use their own vehicles. But implementing the best, most cost-effective program for your company isn’t necessarily simple. Programs that reimburse employees for business miles driven are common, but they can encounter pitfalls. For one thing, is mileage reimbursement taxable?
The short answer is yes, mileage reimbursement is taxable if the reimbursement rate exceeds the IRS rate—set at 62.5 cents per mile for 2022. When an employer reimburses at 62.6 cents per mile or above, each reimbursement will be taxable. This raises questions about mileage reimbursement in general. Do reimbursement rates fairly account for vehicle costs other than fuel? Do they account for the fact that fuel and other costs—such as insurance and state taxes—vary widely across the country? And how can companies ensure that the mileage totals being reported are accurate?
Despite those questions, mileage reimbursement programs are a good fit for companies whose employees drive 500 miles or less each month. Companies whose employees drive further, however, may want to consider other options. We recommend a properly implemented Fixed and Variable Rate (FAVR) reimbursement program.
Companies that reimburse employees above the IRS limit have a couple of options. They can reduce their reimbursement rate to avoid tax consequences. Unfortunately, this doesn’t address the other issues inherent in mileage reimbursement programs. Or, they can implement a FAVR program, particularly if their employees drive further than 500 miles a month.
FAVR is an IRS procedure that, as the name suggests, reimburses both the fixed and variable vehicle costs. Fixed costs themselves can vary widely according to geographic locations. Insurance, for example, can range from $2,476 a year in Michigan to $805 in Maine. A car registration fee is $14 in Mississippi but $101 in Illinois. And property taxes on vehicles range from an average high of $1,012 in Virginia to $25 in Louisiana to zero dollars in 23 states and the District of Columbia.
Variable costs in FAVR depend on how much a vehicle is used, but those costs also fluctuate in other ways. Fuel costs vary from state to state, day to day and even from neighborhood to neighborhood. Recently, the statewide average price for a gallon of regular gas ranged from $4.68 in California to $3.12 in Mississippi. Even in a direct reimbursement program, dealing with the range of fuel costs can be an administrative burden. Costs such as oil, maintenance and tire replacements also vary.
A FAVR program addresses the different types of costs by breaking payments into separate categories— fixed and variable. Fixed payments for insurance, for example, are the same regardless of how many miles an employee travels. Variable payments are based on mileage.
But those fluctuating costs, whether in the fixed or variable category, complicate an otherwise simple and fair solution. Companies with large mobile workforces covering wide geographic areas can have a difficult time managing their program. The flexibility built into FAVR can quickly become a complex task. It creates opportunities for errors or oversights, and could possibly put some reimbursements into taxable territory.
With a more suitable program, companies won’t be asking “is mileage reimbursement taxable?” Especially one that offers a technology platform enabling them to manage a FAVR program simply and accurately. New technology providers like Motus make administering a FAVR program easy and cost-effective.
The Motus App integrates seamlessly with a vehicle reimbursement program, simplifying mileage reporting and reimbursement payments. The platform also easily accommodates input of fixed costs depending on location, giving companies a set-and-forget program. It accounts for the various costs that employees incur when driving for business, updates reimbursement rates as costs change and manages the payment process. The Motus FAVR platform provides companies with the most accurate reimbursements while sparing them the administrative burden of providing FAVR programs on their own.
Employees benefit by receiving a reimbursement specific to the costs of operating a vehicle in their location. The mileage tracking app saves them the time-consuming tasks of recording mileage themselves. And it ensures fair and accurate reimbursements that are also specific to their location. It’s a fair approach that stands apart from other vehicle program methods.
With today’s workforce capable of working from mobile, vehicle reimbursement programs are a crucial part of doing business. A well-run program can also be a factor in attracting talent to a company’s workforce. FAVR offers companies the fairest, most cost-efficient means of proving a reimbursement program, but only if it’s effectively run. The Motus Platform provides accurate reimbursements no matter the location, and essential ease-of-use for both companies and employees. Learn more about our FAVR offering today.