A business meeting on the outskirts of town, picking up supplies or driving to the bank for a transaction, just to name a few, are often tasks that require employees to hit the road with their vehicles. And they are doing it more often than ever before.
After the pandemic and with the rise of remote and hybrid work, more and more people have a need to use personal vehicles for work-related purposes. As compensation for the miles (or kilometres) driven, companies often offer the option of mileage reimbursement. But what, exactly, is mileage reimbursement and why should you be paying it to your employees?
What is mileage reimbursement?
Simply put, mileage reimbursement means compensating employees for the use of a personal vehicle for any work-related journeys. If an organisation does not provide a company vehicle for these trips, employees then have the need to use their cars in order to arrive at their destinations.
Such journeys imply costs that are borne by the employee, like gas and tolls. Other long-run costs such as oil, tires, registration taxes, car insurance, standard maintenance and even depreciation should be considered when discussing mileage reimbursement rates. Tracking and reporting all of these costs could quickly become a burden for employees while processing and reimbursing these expenses would result in a large administrative workload for companies.
Given this challenge, tax offices began working with reimbursement consultants to determine a yearly standardised business mileage rate based on the previous year’s prices. This standard mileage rate provided a simple way for employees to calculate the tax-deductible business costs they incur throughout the year. As a result, many companies turned to this rate as an easy way to reimburse employees, rather than taking on the burden of calculating the actual costs of business travel.
These rates differ according to each jurisdiction, and they are set by official bodies such as the HMRC in the UK or the IRS in the USA. It’s also important for organisations to keep in mind that these rates are often adjusted every year.
All in all, it all comes down to math: if the standard mileage rate for the year in a given country is set at 55 cents per mile, you simply multiply that by the number of miles driven over a given period to find the amount that needs to be reimbursed. If an employee drove 500 miles during the month of July, they’ll get a 275€ reimbursement.
Other long-run costs such as oil, tires, registration taxes, car insurance, standard maintenance an depreciation should also be considered.
Do you really need to pay mileage reimbursements to your employees?
Mileage reimbursement is not something organisations are required to pay by law. However, there might be some exceptions, hence why you need to check local legislation to understand if this is a requirement or not. You can check the regulations for your country by visiting Rydoo’s Compliance Centre.
If the organisation is based in the USA, for example, employers need to pay for these rates if the employee’s earnings fall below minimum wage. Some states, such as California and Massachusetts, have their own regulations regarding mileage reimbursements.
It’s also important to keep in mind that offering employees mileage reimbursements will lead to substantial tax advantages — you can deduct up to the amount set by the government as a business expense when filling out a corporate income tax return —, and it will make your employees happier, leading to higher retention rates.
How mileage reimbursement works
One of the first things you need to understand about how this benefit works is to know which journeys are eligible for reimbursement. At first glance, it might seem pretty straightforward: every time an employee uses their car for a work-related trip, the mileage should be reimbursed. But it’s not as simple as it might seem.
For instance, employees can’t use the business standard employee mileage rate for commutes. Mileage reimbursements only apply when they drive to and from specific work duties, such as driving to visit clients or attending business-related events. If an organisation wishes to minimise the team’s commute costs, it should consider offering other benefits such as reimbursing the value of public transportation.
Offering employees mileage reimbursements will lead to substantial tax advantages and it will make your employees happier.
Employees are also not able to ask for reimbursements while on personal errands during a business trip, except for necessary stops such as lunch breaks.
These reimbursements are paid considering the total cost of driving one mile or kilometre using a private vehicle, and the rate differs according to each jurisdiction. This amount is defined yearly by the tax offices and companies can use it to calculate how much they should reimburse their employees when they know the distance this employee has driven for work. This reimbursement can be paid to the employee without any added tax, as it is an estimation of a business expense.
However, these amounts are not binding, as companies are free to use different rates to reimburse their employees for mileage expenses. Whenever an organisation decides to reimburse a higher rate than the one established by the government, the excess value is considered to be a part of the employee’s salary and, therefore, taxable. You can check the mileage reimbursement rates established by local governments in over 20 countries.
Employees also have the choice of calculating the actual costs of using a personal vehicle, rather than using the standard mileage rates. But when they choose this approach, they must be sure to have documentation to prove the validity of their cost estimates. To be able to prove the deduction, they will need to write down the business miles driven and be able to answer the following questions:
– How many total miles were put on each vehicle they drove for business last year?
– How many of those miles were driven for business, as compared to the number of personal miles?
– How many actual miles did they drive from business destination to destination?
– What was the business reason for driving to those destinations (such as meeting with client Bill Jones at XYZ Corp or picking up supplies at ABC Store)?
– What other business expenses — such as parking — relate to these trips?
The final step in the mileage reimbursement process is, simply put, to do the math. For tax purposes, and in order to maintain a record of their business travel and submit it at regular intervals, the team must document all the information regarding the trip. This can be done by either using a spreadsheet or a digital system that simplifies the process, such as Rydoo.
The software allows employees, managers and finance teams to have easy and full access to all of the information regarding each business trip. It helps calculate mileage reimbursement rates using official rates from over 20 countries allowing businesses to stay compliant at all times, whilst also keeping records that state the beginning and end of the trip, as well as information such as distance, purpose and date.
Why should you reimburse mileage?
As stated above, mileage reimbursement is an option organisations have so they can pay back their employees for the expenses they incur when using a personal vehicle for business-related trips. We’ve also established that when using the right solutions it requires little to no effort. Aside from these, there are a few other benefits you should keep in mind.
Reduced Payroll Tax
As an alternative to mileage reimbursements, organisations could simply resort to increasing their employees’ salaries to compensate them for the costs of business trips. However, this would lead to higher payroll taxes and workers’ compensation premiums. It would also mean you would be paying even during paid leaves and holidays, even though they weren’t driving for you. Mileage reimbursements would help avoid these issues.
Maintaining a fleet of company cars means tracking the business miles that they are driving as well as all of your expenses. The Internal Revenue Service requires organisations to depreciate them, so they must track a complex and frequently changing set of rules to calculate depreciation schedules and apply them when filing their taxes.
At the same time, companies need to track each car’s maintenance and repairs, both from an expense perspective and to protect the investment in the vehicle. With mileage reimbursements, all they must track is how many miles employees drive and how much to reimburse them.
Buying a fleet of cars can be expensive. Even when companies choose to lease them, they still incur some acquisition costs that they either need to expense or amortise over the life of the ownership period. By choosing to reimburse employees for their miles, there’s no real capital loss except, perhaps, updating the accounting system.
Reimbursing employees for the cost of driving their cars can help organisations save money over time in expenses such as insuring cars for someone with an imperfect driving record. Employees can simply bore that cost themselves, whilst companies pay them a fixed rate that is equal for every employee.
Also, if an employee chooses to drive a more expensive or less fuel-efficient car, it’s their choice, and the company does not have the need to incur that extra cost. Another advantage is that if your employees don’t generate a great deal of mileage, your costs will go down because there are essentially no fixed costs with mileage reimbursements. Furthermore, many organisations experience per-mile ownership costs that are higher than what they would have to reimburse their employees.
Happier employees, higher retention rates
Mileage reimbursements are a great perk for employees. If they’re reimbursed for their mileage, they will be more willing to do business-related errands as they will be fairly compensated for those. They also won’t need to worry about accrued mileage costs when you reimburse them. If you choose not to reimburse your employees, they may become disgruntled, which could affect engagement and, in the long run, employee retention.
Refunding employees for their miles can bring great advantages to organisations, but it can become a complex topic and lead to some roadblocks if teams try to go at it on their own. Thankfully, technology can help make mileage tracking and reimbursement a smooth sailing experience.
By using expense management solutions such as Rydoo, companies can easily track and report mileage with just a few clicks. Employees can simply mark the starting and ending points of their trip using our Google Maps integrated app, and the app automatically calculates the mileage reimbursement rate according to the jurisdiction they’re in and the company’s policy.
On the other hand, managers can review and approve mileage expenses in real-time by simply opening the app, checking the automated mileage calculation, and approving the entry. This will help remove the administrative burden for companies while providing fair, accurate, and defensible employee mileage reimbursement.
Mileage reimbursement is a benefit that brings advantages to both businesses and employees. It provides financial relief to employees using their vehicles for work-related travel and, in the end, helps increase retention rates. For companies, it simplifies financial management, conserves capital, and offers great tax benefits.
The process can be easily streamlined by using an expense management software such as Rydoo, that easily tracks and calculates mileage rates, relieving the burden for Finance teams and ensuring a seamless reimbursement process. All in all, reimbursing mileage is a strategic move that helps organisations simplify their processes, retain their employees and, in the long run, help save costs.