While there's no federal law requiring employers to reimburse their employees' business vehicle expenses, many companies choose to do so – and for good reasons. Let's explore ways to determine whether and how an organization should reimburse mileage.
When are employers required to reimburse for mileage?
Federal law requires that all workers receive at least the federal minimum wage, which is currently $7.25/hr. If an employee's work-related vehicle expenses reduce their take-home compensation below the minimum wage, then their employer should be either paying them extra to offset these costs or reimbursing these costs. (Pizza delivery drivers and other restaurant workers are particularly susceptible to this kind of under-compensation.)
Many states and localities have significantly higher minimum wages, and the same principle would hold true in those jurisdiction. If a worker's vehicle expenses are reducing their overall compensation below the minimum wage for that jurisdiction, then they have a right to expect either increased compensation or a reimbursement such as a mileage rate.
Some states also have labor codes that require employers to reimburse all work expenses. These business expense indemnification laws require businesses to be able to prove that they either directly reimburse all business-related vehicle expenses, pay an acceptable mileage rate (such as the IRS standard business rate), or provide extra compensation to offset the vehicle expenses.
The best known and strictest reimbursement labor law is California Labor Code Section 2802. Many California employers rely on the IRS standard business mileage rate to reimburse their employees. However, with gas prices in California continuing to outstrip national averages and with the number of low-mileage drivers increased due to COVID-19, the IRS mileage rate is a less suitable way to comply with the law.
Should an employer reimburse mileage if they don't have to?
Outside of states with employee-friendly labor laws, such as California, Illinois, Massachusetts, Rhode Island, and the Dakotas, should an employer go beyond the legal requirements and reimburse employees for business mileage?
Many businesses do so as a way to boost their benefits packages and stay competitive in attracting talented workers. Hiring and retaining top employees should be one of the highest considerations for an employer considering whether to offer mileage reimbursement.
But it's not just a matter of staying competitive. It is also a matter of treating employees fairly and ensuring that they actually get to keep all of the salary their contract stipulates. If the company is incidentally passing along business expenses that cut into an employee's take-home pay, that is not going to make the employee feel valued and respected.
At the same time, just because it is good to reimburse employees for the use of a personal vehicle, it is not always best to use a mileage rate as the sole or primary method of reimbursement. Let's explore when and how to reimburse employees for mileage.
FAQs about employee vehicle reimbursements
Here are some common questions about when and how to reimburse employees for personal vehicle use. Using the answers, you can evaluate your own organization's practices and whether a change is needed.
Is a commute reimbursable for mileage?
No. A commute from home to a company office and back should not be considered business mileage. However, if an employee makes a business trip on the way home the portion of mileage above the distance from office to home should be reimbursed. Of course, with many people working remotely, a commute may no longer factor in to their mileage.
Is business mileage tax-deductible?
Businesses and independent contractors may claim mileage as a deductible business expense. However, for tax years 2018-2025, employees may not deduct business mileage or business expenses on their tax returns.
In the past, many employers relied on this deduction as a reason not to reimburse employees for mileage. But in the wake of the 2017 tax reform, it is imperative that employers remember that their workers cannot write off mileage.
Are mileage reimbursements taxable?
Under IRS rules, as long as the mileage rate used to derive the mileage reimbursement does not exceed the standard business rate for that year ($.575/mile for 2020), and the employer keeps suitable records of employee business trips and mileage, then those reimbursements are not taxable.
An up-to-date mileage log is necessary in order to demonstrate business use of the vehicle. Mileage reporting can become an Achilles heel, however, if a process does not exist to discourage employees from reporting extra mileage to increase their reimbursement amount.
What's the best way to log business mileage?
A contemporaneous mileage log is best. Dozens of apps exist that record mileage in real time using GPS technology in the employee's mobile device. It is important to choose an app that protects privacy by keeping a wall between the contemporaneous mileage tracking and the periodic mileage reports that go to the employer for reimbursement.
Our app, mLog, is a hands-free, accurate mileage tracker that protects employee privacy and is suited for large and small organizations.
What is a fair rate for reimbursing mileage?
In most cases a fair rate is not a standardized rate such as the IRS rate. While the IRS rate is most common for reimbursements, it is often not a fair rate for an entire organization to use. This is because the IRS rate reflects the national average cost of owning and operating a vehicle per mile – based on last year's costs.
Because some parts of the country are far more expensive than others, and because different workers drive different amounts, a standardized mileage rate often creates inequalities when used for reimbursements. This situation has been complicated by the pandemic-related reduction in business travel.
How to calculate a fair reimbursement rate for employee vehicle use
Unless all of an organization's employees who receive a mileage reimbursement drive similar amounts in regions with comparable driving costs, using a standardized mileage rate will introduce inequities between high-mileage and low-mileage drivers and between drivers in different regions.
The larger and more widespread a company is, greater the variety of business travel costs for employees. Reimbursements can get pretty complicated in this way.
It is also important to know that low-mileage drivers – and there are many due to COVID-19 – often cannot recoup all of their business-related vehicle expenses because they cannot drive enough miles to deliver a sufficient reimbursement amount. High-mileage drivers may attain a reimbursement that exceeds their actual costs.
Calculating a fair reimbursement rate will consume more time than most organizations want to spend. That's why many companies turn to third-party organizations to calculate and deliver individualized reimbursements to employees that comply with IRS taxation rules and state labor codes.
Contact mBurse to learn more about tools to support your mileage reimbursements, rate development, or customized reimbursement administration.