by Gary Jiles
Q: The continuing increase in gas prices has caused me some concern lately because I often have to send my employees on work-related errands or trips. When and how much am I required to reimburse my employees for mileage, or am I even required to reimburse them at all? And do mileage reimbursements create any tax implications for my business or my employees individually?
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A: While employers generally aren’t required to reimburse employees for business-related mileage, some type of mileage compensation may certainly be necessary to attract and retain good employees. Given the rise in gas prices, employees who use their personal vehicles for work-related trips will likely demand some reimbursement now more than ever.
Each year, the IRS releases an optional standard mileage rate. As of July 1, 2008, that rate is 58.5 cents per mile traveled for business purposes, 27 cents per mile for medical and moving travel, and 14 cents per mile for travel for charitable purposes. You can use the standard mileage rate as a benchmark to reimburse employees for business travel. For tax purposes, it’s much less complicated to go by the standard rates than to require employees to keep track of their actual vehicle expenses. However, keep in mind that even when you use the standard rates, employees will still need to keep written mileage records that denote the time, place, and business purpose of their trips.
In general, any type of reimbursement arrangement used by an employer must meet three basic criteria. First, the reimbursements must be made for a deductible business expense (that includes travel for business purposes). Second, the employee will need to be able to substantiate the time, place, use, and/or purpose of the travel (for example, through written records of miles driven and receipts). And finally, the employee should be required to return any excess reimbursement to his employer.
Mileage reimbursement arrangements provide a number of tax benefits for both employers and employees. If you go by the IRS’ standard mileage rate of 58.5 cents per mile, reimbursements are deductible business expenses for your company. Moreover, reimbursements at the standard rate are excluded from the employee’s gross income and are therefore untaxed income.
If you don’t reimburse employees for mileage expenses, they may deduct from their gross income (1) the amount paid under their own mileage allowance or (2) the IRS’ standard rate multiplied by the number of miles driven for business purposes, whichever is less. If you offer a reimbursement plan that differs from the standard rate, you may be required to include the reimbursements on employees’ payroll and income tax records. That’s why most employers simply choose to use the IRS’ standard rates for mileage reimbursement.
Ultimately, it’s up to you to decide whether to pay employees for travel expenses. Tax deductions, rising gas prices, and employee morale may make the decision obvious. And for simplicity’s sake, going by the IRS’ optional standard mileage rates will typically be your best bet.