Employee Mileage Reimbursement Small Business Guide (+ Free Calculator)
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
Employee mileage reimbursement is when a business pays a certain amount to cover the expenses (cost of gas, oil changes, and other maintenance) of an employee using their vehicle for work-related purposes. Most commonly, mileage reimbursement is a set amount for every mile an employee drives when using their personal vehicle for work, although businesses may also reimburse actual costs.
The Internal Revenue Service (IRS) has set a current employee mileage reimbursement rate of 62.5 cents per mile, which is what we recommend employers use (although you can offer more or less). This isn’t considered income by the IRS, unless you offer more than the standard IRS rate. In that case, the difference between the IRS amount and what you offer will be taxable income for the employee. Any amount you pay to employees is also tax deductible for your business.
Use our calculator to compute your employee’s mileage reimbursement and their total taxable mileage reimbursement (if you reimburse more than the IRS standard rate):
Qualified Mileage Reimbursement
Many businesses have questions about what qualifies for mileage reimbursement for employees. Think of it this way: Any driving in an employee’s personal car that’s done for work-related purposes, other than their commute, could be a qualified mileage reimbursement.
Here are some examples:
- Business trips where the employee drives to another city
- Meeting with clients in town (even if the drive is shorter than their normal commute)
- Meetings with prospective clients at your office, the client’s office, a coffee shop, or any other location
- Running company errands
- Making deliveries to employees, clients, or other office locations
Check out our article on how to calculate payroll for more insight on payroll calculations.
Non-qualified Mileage Reimbursement
There are two items that mileage reimbursement isn’t intended to cover: tolls and parking expenses. If your employees drive in a city with toll roads or where they regularly have to pay to park, you’ll need to reimburse them those costs outside of the mileage reimbursement rate. These amounts will be tax deductible for you and not income to your employees.
You only need to reimburse reasonably necessary expenses—meaning that the travel being paid for must have been economical and appropriate. If an employee runs an errand for your company and chooses to drive an extra 20 miles for a more “scenic” route, then you’re only required to reimburse the employee on the mileage less the 20 extra miles driven.
Creating Your Policy & Paying Out Mileage Reimbursement
Before providing mileage reimbursements, you must first set a policy for it. That way, the guidelines will be clear and there will be no room for misinterpretation.
When creating your policy, remember to include:
- The mileage reimbursement rate your company uses
- What trips qualify for mileage reimbursement
- How employees should calculate and record their mileage
- The reimbursement request process for employees
- How and when mileage reimbursements will be paid
Remember: Although we generally recommend sticking with the IRS mileage reimbursement rate, you are free to pay more or less. Offering a higher rate will trigger payroll taxes, and the amount above the IRS rate will be counted as income to the employee.
We also recommend following the list of qualified examples above for your policy, but you can include additional items if you wish.
For each request, you must verify how much mileage you need to reimburse. For security, you can have employees take a picture of their odometer before and after every work trip and have them submit those photos to you attached to the form requesting for mileage reimbursement.
Your company must also decide how often to pay mileage reimbursements. We recommend you pay once per month on a regular payroll day. Doing it just once per month still gets employees their reimbursement in a reasonable time while also giving your payroll team time to process each reimbursement request before paying it out.
When you or the employee’s manager approves the request, it should go to your payroll team to process. You’ll want to make sure they check the calculation to make sure it’s correct. They’ll also need to ensure they mark the payment as a mileage reimbursement so neither your company nor your employee are taxed.
Using payroll software may be able to make these mileage reimbursement calculations a breeze for you.
Legal Considerations for Mileage Reimbursements
While the IRS releases an updated mileage reimbursement rate each year, there is no federal requirement for employers to offer employees mileage reimbursement. Three states, however, do require it: California, Illinois, and Massachusetts. Other states may even require employers to reimburse for other expenses, like tolls.
That said, you should keep in mind two other areas of the law when dealing with employee mileage reimbursement: minimum wage law and tax law.
Minimum Wage Law
Under the Fair Labor Standards Act (FLSA), you’re required to pay employees at least minimum wage, which is currently $7.25 per hour (this may be higher depending on the state or city). If you don’t reimburse for business use of an employee’s personal vehicle, and that employee’s pay falls below the minimum wage because of it, you’ll be facing trouble. In that case, you’d be required to reimburse your employee’s out-of-pocket expenses or mileage reimbursement to ensure their pay at least meets the federal minimum wage.
Let’s take a look at a situation where this might apply.
Minimum Wage & Mileage Reimbursement Example
Let’s say you pay your administrative assistant $8 per hour, but do not have an employee mileage reimbursement policy. The employee regularly uses their vehicle to buy office supplies, making this trip once per week. To get the supplies, the employee has to drive 35 miles each way, which takes about one hour and includes using an $8 toll bridge. The employee usually spends about one hour getting all the supplies. The employee also pays $5 to park.
You’ll of course need to pay the administrative assistant their regular hourly wage for all three hours since it’s all work-related time. But, for each trip, the employee will spend $21 for two tolls and parking. They’ll also need gas, so let’s assume that trip is roughly $20 in gas.
If the employee works 40 hours per week, their net pay is $320.00. Since your company doesn’t reimburse mileage or travel-related expenses, the $41.00 the employee pays each week to make this trip comes out of their own pocket, leaving them with $279.00 in pay. Dividing that amount by 40 hours in the week, the employee is actually making only $6.98 per hour, below the $7.25 minimum wage.
Tax Law
Any amount you pay to an employee beyond actual costs or the IRS standard is taxable as income. Even if you don’t use the IRS rate for your company’s reimbursement policy, you’ll still need to use it to calculate the non-taxable amount—then any amount paid on top of that will be considered taxable. That’s one reason we recommend simply using the IRS reimbursement rate as the cleanest solution for payroll compliance.
Sticking with the example in the previous section, let’s say you now offer your employees a mileage reimbursement of 75 cents per mile, above the IRS rate of 62.5 cents per mile. Your administrative assistant drives 70 miles round trip so they’ll get a reimbursement of $52.50—75 cents (mileage reimbursement rate) * 70 (miles driven). Using the IRS mileage reimbursement rate, however, the employee would only receive $43.75. This means you’re overpaying your employee by $8.75. This additional amount becomes taxable.
Bottom Line
While not a federal requirement, offering mileage reimbursement for employees’ use of their personal car for business purposes is a good policy. Using the IRS mileage reimbursement rate, the amount you pay is tax deductible for your business and not taxable income for your employees, making for a great addition to your company benefits package.
