Are companies required to pay mileage to their employees?
Do I have to reimburse my employees for driving their cars? If this question pops up into your mind thinking about Mileage Reimbursement, you’ve landed in the right place. Become an expert in no time diving into our Mileage Series.
In this second article, you will discover why you should pay back your employee's mileage and how to do it properly. Keep reading, and if you have any question don’t hesitate to check the first article of the series to be up to date - This is why you should pay attention to the employee mileage reimbursement.
Why do I need to reimburse my employees for their mileage?
Most of the times, employers are not required to offer mileage reimbursement to their employees by law. However, in some countries, it is required for organizations to reimburse their employees for business-related mileage. Therefore, it is important to make sure you always check with local law enforcement to be on the safe side. There are four main reasons for an organization to reimburse their employees for their mileage:
- Substantial tax advantages. When you reimburse your employees at the standardized government tax rate, you can deduct up to that amount as an expense when you file your corporate income tax return.
- Employees appreciate it. Even though it is legal to reimburse less than the standardized mileage rate, employees usually don’t appreciate it. Gas costs and repairs are out of pocket expenses. If employees get paid back for those expenses only once a year (at tax time), this may put a lot of strain on them.
- Employee retention. If employees feel they are being treated fairly, they are more likely to stick around longer.
- Employer image. It is a standard and decent business practice. Most businesses do reimburse their employees; you would be standing out in the crowd in a less positive manner when you do not pay for costs made on behalf of your company.
What is considered reimbursable ‘business use’?
To count as a business expense, mileage reimbursement can be paid only for use of a vehicle that is directly related to work. Some examples of work-related driving are visiting clients, making bank deposits and picking up office supplies. Commuting to and from an employee’s regular work location and home is not considered a business expense. Employees may not do personal errands while on a business trip except for necessary stops such as lunch breaks.
FAQs of Mileage Reimbursement
Still don't know on which occasions you have to reimburse your employee's mileage? To provide you with more in-depth information, we answered some of the questions you may still have below:
- Do I have to reimburse my employees for driving their cars?
As mentioned before, whether you may or may not be required to depends on where you live and whether or not your team earns minimum wage. Therefore, it is important for your Finance and HR teams to figure out what the requirements are exactly and build a good policy and reimbursement processes around it. We also already discussed the reasons why we think you should choose to reimburse your employees for their mileage even when it not required by law.
- Should I reimburse the mileage driven to and from work?
You can only reimburse your employees when they drive to and from specific work duties. That means commutes are not a part of this equation.
- Can all my employees deduct their mileage expenses?
Not exactly. Your employees can’t use the business standard mileage rate after claiming other deductions, such as full purchase price deduction, for that same vehicle. They also cannot use the business rate for multiple vehicles at the same time. And it almost goes without saying that they can’t deduct their commute. If you somehow want to minimize your team’s commuting headache, look into offering commuter benefits.
- How do I reimburse my team?
If you are paying back your team, it is recommended you use expense-tracking software to pay your employees every few weeks or months at the rate of your choosing. Set a rate, have employees enter their mileage and calculate how much you owe them. You can then reimburse them through your payroll software. Keep in mind that when you pay your employees a higher rate than the federal tax rate, the extra counts as taxable compensation to the employee.
At times a company prepays a mileage reimbursement. This is convenient when one of your employees is traveling out of town, for example. However, your employees are required to return any excess reimbursement. As a business, you can also choose to pay less than the standard federal tax rate for business travel. In that case, your employees are entitled to claim the difference as a tax deduction. For instance, if you pay 40 cents per mile and the standard rate is 56.5 cents, your employee can write off 16.5 cents per mile for work-related driving when filing his tax return.
- How do mileage tax deductions and documenting mileage work?
Employees who track their mileage to and from specific work obligations can deduct that mileage, using the federal tax deduction rates, or the actual costs of using their own vehicles. Your team must chronicle everything by using a mileage tracking app such as Rydoo’s or just a good old-fashioned spreadsheet, in order to maintain a record of their business travel and submit it at regular intervals. For instance, your business might ask for employees to turn in a mileage log at the end of each pay period. For each business trip, this record should state the beginning and ending odometer readings as well as the distance, purpose, destination and date of the trip.
It is important to set out the requirements for your employees clearly, because when they don't follow the rules as determined by the Internal Revenue Service, both you and your employees may lose the tax advantages.