Every year, the IRS sets an optional standard mileage rate so contractors, employees, and employers can calculate deductible costs for business travel.
However, there are other factors to consider if you want to set a fair reimbursement policy. The best way to do this is by collecting relevant data based on geography.
What is it?
Mileage reimbursement is a policy that enables employees to be reimbursed for their vehicle costs when using their car for work-related travel. It includes fuel, maintenance, depreciation, and other out-of-pocket expenses related to running a business vehicle.
It’s a great way to reduce employee travel costs and improve employee satisfaction and retention. However, you should teach your employes how to fill out a mileage reimbursement form so they know what it is and how it might affect their pay when you set up a mileage reimbursement policy.
Mileage reimbursement schemes are classified into CPM (Cents Per Mile) and FAVR (Fixed and Variable Rate). The former aims to cover only the fixed costs, such as insurance and depreciation, while the latter covers more variable expenses, including gas, oil, tires, and more.
Many organizations use the IRS standard mileage rate to reimburse their employees, but that doesn’t mean it’s the only option. Other approaches include separating the fixed and variable costs, such as depreciation and insurance, and reimbursing them separately.
Reimbursement should be discussed in advance with an employee, and it should be set up based on standard federal rates. It will help ensure that reimbursements are appropriately tracked and submitted to the IRS. In addition, it’s essential to discuss the process for storing records of submitted mileage and expenses.
How do I get reimbursed?
Mileage reimbursement may be a terrific way to keep your business going, but it’s also a complicated subject that necessitates a thorough grasp of the law. You may guarantee that your mileage reimbursement strategy is compliant and effective without jeopardizing your bottom line.
First, you must determine a mileage reimbursement rate fair to your employees and the IRS. Then, you can either pay at the federal standard mileage rate or select a higher or lower amount if you prefer.
Next, you’ll need to decide on a tracking method that suits your company’s needs. For example, it can be a manual log that employees fill out each time they drive for work, or it can be digitally tracked with an app or a web-based tool.
You can also use a fixed and variable rate (FAVR) to reimburse your employees for mileage, combining the IRS’s standard mileage rate with a flat allowance that covers all their other vehicle costs.
To calculate your mileage reimbursement, multiply the miles you’ve driven for business purposes by the standard mileage rate. It is a great way to stay on top of your company’s expenses and keep your employees happy. First, however, be sure to check your expense report calculations in Excel to make sure that they are accurate.
Is it taxable?
Whether or not mileage reimbursement is taxable is a complicated question that depends on the employer and employee. However, it is only a taxable income if the rate used to reimburse employees exceeds the standard IRS mileage rate–set at 62.5 cents per mile for 2022–and the amount does not match the expense incurred by the employee.
Regardless of the method used to reimburse employees for their business miles, it is essential to remember that it should always put the employee above minimum wage.
For this reason, some employers use a flat fee or allowance system to reimburse employees for their mileage costs. Of course, such policies need to have a defensible reimbursement rationale, but this should be done under an accountable plan, which requires that the fee or allowance be based on services performed for the employer, adequately accounted for, and any excess returned within a reasonable period.
Employers can also use a fixed and variable rate (FAVR) program to determine an efficient mileage reimbursement rate that reflects current gas prices. However, this approach can lead to uncontrollable costs if the company’s reimbursement rate doesn’t cover the actual cost of driving to work.
How do I track my mileage?
Keeping track of your mileage is challenging, but it can be essential for tax deductions or reimbursements. There are many ways to do it, from paper logs to apps. But there are a few things to consider when choosing the best way for your business.
Ideally, you’ll choose a tracking method that meets IRS requirements and is accurate and efficient. Also, ensure the app you choose has features that suit your needs.
Many apps also have a free device that can automatically track your drives in your car. It saves you the hassle of manually logging your mileage, and it’s also a great way to promptly stay on top of all your trips.
However, there are a few downsides to this type of app. For one, it can drain battery power and data usage. Another issue is that it needs to show the full path for each trip.
The best way to keep track of your mileage is to use a GPS-based tracking app that will record your trips accurately and automatically. This way, you’ll have a much more accurate record and be able to deduct your business miles.