The 2018 tax reform made it crucial to pay the proper mileage reimbursement to employees. Employees cannot deduct unreimbursed business expenses until 2025. They now expect employers to pay a mileage rate that covers all car expenses.
What's the right mileage reimbursement rate for 2020?
For many people, this question refers to the IRS mileage rate of $.575 per mile in 2020. This is considered the standard amount that businesses pay employees for the use of their vehicle for work. The IRS rate, however, is not always the right amount to pay, especially under the new tax law.
In the past, some organizations avoided paying any vehicle reimbursement at all and told their employees to just write off vehicle expenses. Others paid the same mileage rate year after year without checking to see whether employees’ expenses were fully being covered. They figured employees would just fill out Form 2106 on their tax return and deduct any expenses not covered by the reimbursement.
But both approaches will cause serious problems now. Many employees with business vehicle expenses essentially took a pay cut in 2019 via their 2018 tax refund. Employers who have not evaluated their reimbursement rate for 2020 will likely face complaints from employees as a result. According to our 2019 Car Reimbursement Survey, over 60% of employers report such complaints.
Will the IRS business rate be a sufficient mileage reimbursement in 2020?
If you own or manage a business that pays a mileage reimbursement, you need to take the new tax landscape seriously. You need to re-evaluate the rate and ensure that no employee faces an income loss via increased taxes.
Even if you currently pay the IRS business rate, you cannot assume that all employees are receiving a fair and sufficient reimbursement. This is because the rate published by the IRS reflects an average of all U.S. motorists' vehicle expenses for the previous year, based on the average amount of miles driven. That means if your employees live in expensive parts of the country or drive less than the average amount, the IRS rate will not fully reimburse their vehicle costs.
If your current rate does not fully cover all employees' expenses, they will take measures to recoup that loss. These measures could include the following:
- Labor code complaints and lawsuits – Illinois and California labor laws require full reimbursement of employees; other states also protect employee rights, and it’s likely that more states will tighten up labor codes now that employees can’t write off expenses on Form 2106.
- Loss of productivity compared to costs – Employees who receive a mileage rate may drive unnecessary miles or report empty miles to add income.
- Increased attrition – Employees whose companies do not adjust to the new tax code will leave for employers who do fully reimburse employee expenses.
Determining the right vehicle reimbursement policy for 2020
Your employees' expense needs may differ greatly from the national average. Within your company, expenses may vary widely. You need a guide to help you figure out the right policies and mileage reimbursement rates for your organization and its employees.
We have created a detailed exploration of the ins and outs of mileage reimbursements to help you navigate the new landscape. In this guide you’ll discover
- The full range of expenses a car reimbursement should cover
- Methods you can use to reimburse employees, including the IRS rate, fixed and variable rate reimbursement (FAVR), or a company mileage rate
- Which method is best for your organization’s size
- Whether your mileage reimbursement should be taxed
- Whether the IRS mileage rate is right for your company
- Ways to comply with strict labor laws like California Labor Code Section 2802(a) or the Illinois Wage Payment and Collection Act.
- The shortcomings of most mileage reimbursement rates
- How to address these shortcomings effectively
- Further in-depth information about how tax reform affects reimbursements
With a complete understanding of these topics, you’ll be able to determine whether your current policy will withstand the new tax landscape. You’ll also be equipped to fit your mileage rate to the actual needs of your employees. This way you can retain good employees while also controlling costs.
Take the time to educate yourself now so that you can treat your employees equitably in the coming years.