The reimbursement of mileage expenses is not mandated by federal law. But employees and employers can utilize the IRS mileage rate which the Internal Revenue Service posts every year to serve as reimbursement guide.
What Is Mileage Reimbursement?
Mileage reimbursement is a mutually valuable opportunity to get tax deductions for the employer as well as the employee, but offering reimbursement is not as easy as giving the money or filling out the simple tax form. The IRS entails that the money paid must be demonstrated by the employee based on the requirements of the IRS Code.
How To Set Up Mileage Reimbursement?
Before you begin reimbursing your employees for the expenses of your business, it is important that you first determine if you have an accountable plan set for reimbursement arrangement. An accountable plan is an expense or reimbursement allowance agreement. If the employer has no accountable plan at hand, the IRS Publication 15 states that payments to an employee for travel and other expenses related to your business stated in the nonaccountable plan are wages. These are deemed as supplemental wages and are subject to the payment and withholding of social security, Medicare, and income. To be able to have an accountable plan, the employer’s allowance or reimbursement arrangement must meet three rules; namely, a business connection, returning excess amounts, and substantiation.
Although it depends on the employer on what to reimburse, it is best to reimburse the precise IRS mileage rate. Here are the top five reasons why.
1. Costs of Gas
All the costs related to driving could be tedious and more of a hassle. Fortunately, the gas costs are included in the rate the IRS places for reimbursement mileage. Because of this, you do not have to include the gas receipts of your employees. All you have to do is pay the employees based on the mileage. You can use Google Maps to track their routes, use the mileage submitted by the employees, or use the gas receipts they reported.
2. Unclaimed Tax Deductions
Employees can subtract the mileage that employers did not reimburse, but they can only do this if they itemize their deductions. The majority of low wage earners that have no properties are most likely not itemizing their deductions. In other words, if the employer does not reimburse the entire rate, there is no other way that the employee can reimburse their lost expenses. It could be fine if the selected rate covers gas and the employee does not drive too much to cause any wear and tear on his vehicle. However, if the employee does not itemize the deductions and drives a lot, he is going to be out of change.
3. Employee Retention
Reimbursing the full IRS mileage rate is perfect for retaining employees and for their morale. It is very costly to lose good employees and hiring unhappy workers is costly too. Employees feel that they are valued if they do not feel shorted or used. In addition, delivery drivers and salespeople have a massive impact on the success of the business. This is because they are always at the forefront of dealing with the customers and take charge of the business’ inventory.
4. Minimum Wage
The employer could be violating the minimum wage laws if the out of pocket business expenses of the employees cause them to be below the minimum wage. According to the Department of Labor, wages must be paid and free from deductions that are impressible.
5. State Laws
If your business is in California, or in several other states with their own reimbursement laws, then you are entitled to reimburse the full IRS mileage rate.
Reimbursing More Than the IRS Rate
Reimbursing more than what the IRS rate requires is not common, but there are several employers that provide a fixed mileage allowance to their employees who drive their own vehicles.
Reimbursing Less Than the IRS Rate
Although employees can subtract the mileage that their employers do not reimburse, it is only possible if the deductions are itemized. The majority of the low wage earners that do not own properties are most likely not itemizing their deductions. In other words, if the employer does not reimburse the entire rate, there is no way for the employee to get his lost expenses back.