Updated as of June 2018.
Paying your team back for driving can drive anyone crazy. Well, hit the brakes on your confusion. In this overview, we’ll explain all the twists and turns of mileage reimbursement so you can decide what to do for your employees as they zip around town.
What are the mileage reimbursement rates for 2018?
Each year, the IRS sets a standard mileage reimbursement rate so that contractors, employees, and employers can use them for tax purposes. This rate applies to both cars and trucks and fluctuates year by year. Here they are:
- 54.5 cents per mile for regular business driving. (This is the one that applies to most companies.)
- 18 cents per mile for medical or moving work
- 14 cents per mile for charity-related work
Most companies use the business rate (54.5 cents) as their holy grail while crafting their travel reimbursement policies. Do you have to follow these rates exactly? Not quite, but we’ll explain more below.
Do I have to reimburse my employees for driving their cars?
The short story:
- Possibly. You may be required to, depending on which state you live in and whether your team earns minimum wage.
- It can help you on the tax side, since reimbursements are a deductible business expense.
- It can also help keep your team happy, since they know they won’t have to dig into their own pockets for work expenses. Employee retention for the win.
- 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.
The long story:
There is no federal law that says you need to pay your team for driving their cars for work purposes. However, your state may require you to do so. For example, California and Massachusetts both have laws that say companies have to pay their employees for business expenses like mileage.
Check out your state’s labor law website to ensure you’re following the letter of the law.
Do some of your employees who travel for work make minimum wage or something close to it? Then there’s another thing to note from the Fair Labor Standards Act: If your team members’ work-related travel expenses dip their earnings below the applicable minimum wage, you’re responsible for making up the difference.
Now, even if your particular state doesn’t require mileage reimbursement, it’s a good idea to do it anyway since it’s a pretty standard business practice. Folks who use their personal cars for work tasks will definitely appreciate getting paid back since gas, insurance, and repairs are out-of-pocket expenses that don’t come cheap.
Should I use the standard IRS rate?
Most companies do. However, the federal rate is merely a recommendation. If you operate in an area where gas and tolls are more expensive, you may want to hike up your rate. However if you use a rate that exceeds the federal standard, the excess would be taxable for the employee.
At the same time, you may want to lower your rate if you’re in an area that’s less expensive. And even if you don’t reimburse your team, they may be able to get money back by deducting mileage expenses from their gross income. Which leads us to our next topic:
The tax side of mileage reimbursements
How do mileage tax deductions work?
Employees who track their mileage to and from specific work obligations (or any of the other tax-deductible destinations mentioned above) can deduct that mileage, using the IRS deduction rates, or the actual costs of using their own vehicles.
Your team can chronicle everything by using one of the many mileage tracking apps out there, or just a good old-fashioned spreadsheet.
Can all of my employees deduct their mileage expenses?
Not exactly. Your employees can’t use the business standard mileage rate after claiming a Section 179 deduction for that same vehicle. They also can’t use the business rate for five or more vehicles at the same time. And it almost goes without saying that they can’t deduct their commute, as nice as that would be.
Want to minimize your team’s commuting headache? Try offering commuter benefits.
How do I reimburse my team?
If you’re paying back your team, you can use expense-tracking software to pay folks every few weeks or months at the rate you choose. Set a rate, have employees enter their mileage, and calculate how much you owe them. You can then reimburse them through your payroll software. Remember, if you don’t reimburse mileage, employees can deduct it from their gross income on their taxes.
And there you have it—your playbook for mileage reimbursement. With this guide in your (mental) dashboard, you’ll be able to pay back your team, stay compliant, and keep your company moving and grooving.