If you drive a personal vehicle for work, your employer may pay a mileage rate to offset the costs you incur. Once you know the mileage rate, it's easy to calculate the reimbursement. But is that reimbursement sufficient?
How does a mileage reimbursement work?
To cover employee vehicle costs incurred as part of the job, an employer pays a cents-per-mile rate to employees. The standard mileage rate for 2023 is 65.5 cents per mile, as set by the IRS.
You multiply this rate by the number of miles you drive over a payment period, and the result is your mileage reimbursement. Say you drive 1000 miles this month. Your reimbursement amount will be $655.
What does a mileage reimbursement cover?
Operating a vehicle for work generates far more expense than just gas. The list of covered expenses is quite large. Oil, tires, taxes and registration, maintenance, and car insurance – even depreciation is included.
Reimbursable vehicle costs might amount to more than you expect. Consider depreciation and insurance – these two alone comprise about 60% of the average American driver's vehicle costs. So you need to ask whether your mileage reimbursement rate fully covers your costs.
Are mileage reimbursements taxable?
As long as you receive the IRS mileage rate or less – $.655/mile for 2023 – you pay no taxes on a mileage reimbursement. Some companies pay a fixed monthly car allowance along with a modest mileage rate. In this case, the allowance is taxed but not the mileage.
There is also a plan called fixed and variable rate reimbursement that pays both a fixed amount and a variable mileage rate. This approach, also known as a FAVR reimbursement, remains non-taxable as well.
What's the best way to track business mileage?
In order to receive a mileage reimbursement, you have to keep track of miles driven. Your employer may leave it entirely up to you to track and report mileage, or you may have a system you use to record trips that calculates mileage for you.
Keeping track of mileage can be a time-consuming process. What if all you had to do was open an app on your phone at the beginning of a trip and that was it? Our mileage tracking app uses GPS to automate mileage tracking and recording. This allows you to focus on your job, rather than adding up and reporting miles. But what about privacy?
Our mileage tracker, mLog, records miles driven in real-time but only reports the business mileage and we don't report your personal trips or whereabouts in real-time. You can always go back and edit trips if you forget to turn the app off during a personal errand.
How to calculate a fair mileage reimbursement
When receiving a mileage rate, it's important to compare your expenses to the reimbursement amount. If you work in an expensive part of the country, or if you drive fewer miles than average, you may find that your mileage reimbursement does not keep up with your costs. High gas prices will also reduce your wages since most company mileage rates are not responsive to gas prices.
Looking back at the list of expenses that a mileage reimbursement covers, you can estimate your monthly costs. Receipts and credit card statements will allow you to calculate how much you typically pay per month for gas, insurance, maintenance, oil, etc. There are car depreciation calculators online. (Or try this free tool.)
If you find that your reimbursement isn't keeping up, what do you do? You have a right to expect your employer to provide a full reimbursement of business expenses. In some states, such as California and Illinois, the law actually requires employers to reimburse all work-related vehicle expenses.
Chances are, you're not the only one at the company receiving an insufficient reimbursement. It may be time for the employees to request a more robust vehicle reimbursement.
Educate yourself about FAVR reimbursement
If you're already receiving the IRS standard rate of $.655/mi, seeking an increased rate is not in your best interest, since anything over that rate will be taxed. Instead, the best interest of both the company and the employees could be fixed and variable rate reimbursement.
A FAVR reimbursement plan provides highly accurate vehicle reimbursements. The fixed monthly payment addresses fixed costs like depreciation and insurance. The variable rate responds to changes in gas prices and other variable costs. And all the payments remain tax-free.