Reimbursing your employees for the business miles they drive in their own vehicles is an alternative to the two extremes of either having your employees swallow the cost of driving their own cars for work or providing a fleet of company cars for them to drive.
Mileage reimbursements are simple to calculate and require relatively little bookkeeping. They are also extremely cost-efficient and give you a tax-break, because mileage reimbursement is a deductible business expense for your company. If we have not been able to convince you by now that employee mileage reimbursement is a good thing, perhaps the significant benefits mentioned below will push you over the edge.
Reduced Payroll Tax
An alternative to mileage reimbursement is simply to increase your employee wages or salaries to absorb the cost of them driving their own cars. However, if you do this, the income you pay them may be subject to payroll taxes and workers’ compensation premiums. It also will be built into what you pay them when they are on paid leave, even though they aren’t driving for you. Mileage reimbursement avoids these problems.
If you maintain a fleet of company cars, you need to track the business miles that they are driving as well as all of your expenses. The Internal Revenue Service requires you to depreciate them, so you must track a complex and frequently changing set of rules to calculate depreciation schedules and apply them when you file your taxes. At the same time, you need to track each car’s maintenance and repairs, both from an expense perspective and to protect your investment in the vehicle. When you make mileage reimbursements, however, all you must track is how much your employees drive and how much you reimburse them.
Why you should pay attention to the employee mileage reimbursement
Buying a fleet of cars can be expensive. Even if you choose to lease them, your company typically incurs some acquisition costs that you either need to expense or amortize over the life of the ownership period. When you choose to reimburse employees for their miles, you have essentially no capital costs other than, perhaps, reprogramming your accounting system.
Reimbursing employees for the cost of driving their cars should save you money over time. You won’t have to bear the cost of insuring a car for someone with an imperfect driving record — employees pay that cost, and you pay them the same reimbursement as everyone else. If an employee wants to drive a more expensive or less fuel-efficient car, it’s her choice and you aren’t paying for it. 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 reimbursement. Furthermore, many businesses experience per-mile ownership costs that are higher than what they’d reimburse their employees.
Last but not least: happy employees
Mileage reimbursement will increase your employee satisfaction level and you will receive a tax deduction when you reimburse employees for mileage. Mileage reimbursement is a great perk for employees. Employees who are reimbursed for their mileage will be more willing to make business-related errands and employees will feel fairly compensated. They don’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 employee engagement.