Running business errands is sometimes unavoidable. As a small business owner, you don’t always have the time to run errands yourself. Maybe you need to get more supplies or pick up food for a client meeting. Your employees can be helpful in situations like these.
Do you provide company cars to each of your employees? Most small businesses don’t. But, employees can use their own cars to run business-related errands. When they do, you can provide mileage reimbursement.
What is mileage reimbursement?
Mileage reimbursement is when you compensate employees for using their personal cars, vans, pickups, or panel trucks for business errands. Use the IRS standard mileage rate for reimbursement. The federal mileage reimbursement rate is set each year. For 2018, the standard mileage reimbursement rate is 54.5 cents per business mile driven.
Say an employee drives 10 miles to meet a client and 10 miles to return to the office. This would be 20 business miles driven, so you would reimburse that employee $10.90 (20 X $0.545).
What does mileage reimbursement cover?
You might be wondering where the rate amount came from. Does mileage reimbursement include gas? Does it include maintenance? The rate is based on fixed and variable costs of operating a vehicle.
The mileage reimbursement rate for employees includes:
- Standard maintenance
- Registration fees
If your employees use company cars, you should not reimburse them with federal mileage reimbursement.
How does mileage reimbursement work?
Employees must keep track of the mileage they drive for business. They might keep a pen and paper in their cars for recordkeeping.
Most businesses give employees mileage reimbursement forms. These forms might ask employees the following information about their business-related drive:
- Business purpose
- Miles travelled
- Total miles
Typically, the forms have many lines so that employees can enter multiple trips. This means the employee doesn’t need to fill out a form per business-related trip. And, the employee receives a lump sum instead of small payments. Some employees submit the form once every few months or once a year.
You can decide when employees turn their forms into you. Create a mileage reimbursement policy, and include it in your employee handbook. You should talk about deadlines, qualifications, and exemptions in your mileage reimbursement rules.
How to reimburse mileage
Paying mileage to employees is up to you. You can include mileage reimbursement with an employee’s regular wages via direct deposit or check. You can also reimburse employees with a separate check.
Most businesses reimburse employees for mileage separately from payroll. Generally, you should refund employees within a time frame of two weeks after they submit their mileage report.
Reporting mileage reimbursement for employees falls under an accountable plan. Since the expenses are business-related, do not include the reimbursements in the employee’s wages on their Form W-2. And, employees cannot deduct the expenses.
Is an employer required to reimburse for mileage?
You are not required to offer mileage reimbursement to employees under federal law.
The Fair Labor Standards Act says you can’t pay employees under the minimum wage. You need to make sure that you pay employees at least the minimum wage after deducting mileage expenses. If an employee has uncovered mileage expenses that brings them below minimum wage, you could get in trouble.
Some states might require that you reimburse employees for business-related mileage. Check with your state for more information.
Benefits of providing mileage reimbursement
Offering mileage reimbursement to employees has many benefits. You can increase employee satisfaction and even 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 do not reimburse employees, they might be disgruntled, which could affect employee engagement.
But wait, are reimbursements taxable?
Another benefit of providing reimbursement for mileage is that you receive a tax break. Mileage reimbursement is a deductible business expense for your company. File Form 1040 and Schedule C or Form 4562 with the IRS to receive a business mileage deduction.
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This article has been updated from its original publication date of March 21, 2012.
This is not intended as legal advice; for more information, please click here.