Mileage reimbursement is one of the most popular ways to cover the business expenses of employees who drive a personal vehicle for work. Here are four pitfalls of mileage reimbursement – and how to avoid them.
A Brief Guide to Reimbursing Employee Business Mileage
Reimbursement of business mileage typically involves a cents-per-mile rate applied to monthly mileage totals submitted by employees. Nine states require full reimbursement of business vehicle expenses. But even in the many places where vehicle reimbursement is not required, staying competitive requires offering a robust vehicle reimbursement program.
As long as the mileage rate remains at or below the IRS business mileage rate, the payments are tax free. (65.5 cents per mile for 2023.) This feature makes mileage reimbursement a desirable option for many organizations over car allowances, which are typically taxable income.
Because mileage reimbursement is simple and straightforward, it is easy to ignore pitfalls that accompany this method of vehicle reimbursement. Here are a few pointers to help business owners and managers avoid these pitfalls.
4 Mileage Reimbursement Pitfalls, and How to Avoid Them
Most of the problems related to paying a mileage rate to employees arise from unintended consequences. Educating yourself on how your program works can go a long way to addressing these problems proactively.
1. A standard mileage rate may not work for all employees.
The beauty of a mileage reimbursement program is its simplicity. But the larger and more varied your workforce, the more that simplicity can hinder fair reimbursement. Employees who drive a lot may earn money relative to their actual expense needs. Employees who drive less than average may not be able to cover their expenses through the reimbursement. In the same way, expensive locations can drive an employee's expenses beyond what the company-wide mileage rate can deliver.
2. The IRS business mileage rate may not be suitable for your organization.
Originally, the IRS business rate was designed to help individual taxpayers estimate their business expenses for the purposes of tax deduction. The rate works well as a predictor of expenses for the average driver nationwide. But you may have employees who live in more expensive states, like California, or who drive far more or far less than average. It is possible that a lower mileage rate is more suitable for your organization, or that a higher rate is. However, any amount above 65.5 cents per mile is taxable.
3. A cost-effective mileage reimbursement relies on accurate mileage tracking.
To meet IRS requirements, all business trips should be logged soon after completion with the date, mileage amount, and destination/purpose clearly indicated. In the past, many organizations relied on employees to report this information, which often has led to overreported mileage, whether through estimation or actual mileage fraud. With organizations increasingly adopting mileage tracking apps a reduction in inflated mileage reports is possible. However, it is crucial to determine whether the app accurately reports mileage, is user-friendly enough to eliminate manual entering of mileage, and has sufficient privacy protections for employees.
4. A mileage rate can incentivize unnecessary driving.
Even if you have an accurate mileage tracking method, a mileage reimbursement rate can still lead to cost control issues. Because an employee's reimbursement is tied to how much he or she drives, there will always be an incentive to drive more than necessary. This may be the result of an employee not receiving a sufficient mileage rate to cover expenses, perhaps related to location-based costs. Or it may be the result of outside financial pressures like inflation pushing the employee to take steps to secure income.
How to Address the Pitfalls of Mileage Reimbursement
There are a number of best practices that can alleviate the unintended consequences of a mileage reimbursement program. An obvious one is to adopt an accurate mileage tracking method. But beyond that step are some less obvious practices:
1. Base your mileage reimbursement rate on data.
If your mileage reimbursement is not based on vehicle expense data, then chances are your policy does not meet the needs of your employees. The IRS rate is based on last year’s averages, not on your employees’ data. You need to know the range of expense needs within the company – between drivers working small or inexpensive territories and drivers working large or costly territories.
2. Use a reimbursement rate that works for all employees.
If you’ve been using the same mileage rate for a long time, chances are that it’s not serving the needs of your employees. And they will be more eager than ever for an increase to offset the rapidly rising costs of vehicle ownership. If not, many of them will likely begin driving extra, unproductive miles or even report extra miles that they didn’t drive.
3. Don't pay an equal amount for unequal expenses.
If you find that employees drive widely varying distances or face discrepancies in geographic costs, then one single mileage rate just won’t work for everyone. Unless the range of expenses between employees is fairly narrow, you will need a more flexible approach than a standard mileage rate.
4. Quantify the reimbursement rate, protect the company.
Once you have the data on your employees’ vehicle expenses, and have adjusted your vehicle reimbursement policy to cover all employees’ expenses, you should be able to quantify how the reimbursement covers these expenses. That will protect your organization from labor code violations in states that require full reimbursement of business expenses.
A More Flexible Vehicle Reimbursement
All these best practices require a greater level of flexibility than the typical mileage rate can deliver – especially if you have both high-mileage and low-mileage drivers. This will lead some employers to question whether it is best to adopt multiple mileage rates based on employees' locations or to adopt a different approach to vehicle reimbursement, such as a FAVR program (fixed and variable rate reimbursement).
To learn more about the varied options for vehicle reimbursement and mileage tracking, read one of our longer guides:
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