What is mileage reimbursement and how do you track it?
Do you find your employees spending more time behind the wheel for work-related trips rather than sitting at their desks? If your employees are using their private automobiles for hopping between offices, meeting up clients, or bringing in office supplies, then they qualify for mileage reimbursement.
Mileage reimbursement benefits both the employer and the employee. While the employee receives payment for mileage expenses made on behalf of the company, it also provides business owners with tax-reduction incentives. But reporting business mileage is not an easy task.
What are mileage reimbursements?
It refers to the compensation associated with a mileage cost given to the employee for using their private vehicle to conduct business-related errands and trips. Sometimes, employees are needed to use their automobiles for company purposes.
In this case, mileage expenses are to be refunded to the employee, and the rate is decided by the government of your country considering gasoline prices. Since every business purpose is different from the other, three broad categories determine the mileage rates.
What does mileage reimbursement cover?
You have to take into consideration a variety of vehicle-related expenses when an employee’s private vehicle is being used. A standard business mileage cost exceeds current fuel prices and additionally covers wear and tear, new tires, oil change, insurance premiums, and registration fees. Any other associated charges such as parking and toll charges are not considered part of their mileage pay. Mileage rates also vary according to the purpose a vehicle is driven for.
Moving and medical purposes
Moving business assets and inventory from the factory to the warehouse? Going for a doctor’s appointment? All these purposes are reimbursable. The cost of this mileage is less than direct business purposes but more than charitable reasons.
Charitable purposes
If you are driving as a volunteer for a charitable cause, you qualify for mileage reimbursement. These have the lowest mileage rates amongst all three groups. But driving a kid volunteer to a charitable cause doesn’t qualify for compensation.
Business purposes
From going out to acquire business resources to traveling between offices and client meetings, mileage covered while conducting direct business-related activities qualifies for mileage reimbursement. This kind of business mileage receives the highest mileage rate.
How does mileage reimbursement work?
In most countries, corporate travel can be claimed as reimbursement by employees. Since the reimbursement is not calculated along with their salaries, the employee reimbursement is tax-deductible. At the same time, the business too can file for tax relief on account of reimbursement.
Business mileage reimbursement extends the same benefit to the employees who have to use their private vehicles for business-related work. Whether your employees use a truck, car, or a bike, the mileage cost they incur can be repaid to them and exempt you from paying tax on it.
However, before your employees start lining up for compensation, remember: Mileage reimbursement does not cover an employee’s daily commute to and from work. It only covers the trips an employee makes during work, for work. For a business-related trip to qualify for reimbursement, it must fulfill two requirements:
a) It is common practice concerning the line of work.
b) It is necessary and serves the company goals.
Some of these trips could look like:
a) Going to meet a client
b) Going for a meeting or a conference/convention
c) Collecting business resources
d) Running errands on behalf of the company
Note, however, that the majority of the trip must be business-related. This means that if you are picking up some office document while on your way to a party, that does not qualify for mileage reimbursement.
How to keep track of mileage for reimbursement?
Good record-keeping is an important part of reimbursement, as, without it, it would be impossible for your employees to qualify for compensation. That’s why it’s important to log every business trip and include these crucial details:
a) Date and time of the trip
b) Mileage covered (track using the readings provided on your vehicle’s odometer)
c) Destination of each drive
d) A brief description of the purpose of each drive
Three ways your employees can track their mileage expenses, ranging from traditional to digital & advanced versions.
These are the low-cost mileage tracking options but are time-consuming and riddled with inaccuracies. Since these logbooks and spreadsheets are manually recorded, it leaves a lot of room for error. Sometimes your employee might start a drive and not take note of the current number on their odometer, which leads them to record guesstimates.
These are the most accurate and efficient ways to track and report trip details. Mileage tracking apps use GPS technology to accurately track the distance and mileage from the start to the end of the destination without having to do any manual entry. These apps save time putting records, creating invoices, and reporting mileage expenses to receive tax benefits.
Expense management systems are used for employee reimbursements and are a better option than paper-based recording when it comes to mileage reimbursement. Although they are a medium-cost digital option that still relies on manual data entry by the employees, however, once the basic information has been entered, the system automatically fact-checks against odometer readings, receipts, and other such proofs for easy reimbursements.
Standard mileage reimbursement rate
The standard mileage reimbursement for employees that use their private vehicles for company causes gets recalculated every year. A lot of factors are considered when calculating mileage rates. The price is usually higher than the current gas prices and takes into account any wear and tear and insurance costs.
An increase in mileage rates affects all those businesses that offer mileage reimbursement to their employees using private vehicles for business purposes. In case you do not follow the standard reimbursement rate, it is highly recommended that you increase your rate per mile to fairly compensate your employees, keep them happy, and retain them for a long time.
Tips to better mileage management
Consider an equitable mileage rate - not the standard one
There are multiple inaccuracies when the standard rate is being calculated. It takes into account last year’s average vehicle cost, average insurance premiums, and average depreciation based on a certain number of miles. However, unless your employees are experiencing all the above factors, reimbursing them on the standard mileage rate is highly incorrect.
This can prompt high-mileage drivers to add in a few extra miles to earn more out of reimbursement, leaving you unable to control your mileage expenses. That’s why you should consider adopting an equitable mileage rate that doesn’t reward employees for driving more.
This means that the rate is adjusted for each employee based on the kind of traveling they do and the prevalent gas prices. Having a different mileage for each employee is a cumbersome process, however, this will ensure that each employee is paid fairly.
Standardize the vehicle instead of the mileage rate
As we previously said, the best way to compensate employees fairly is to create an equitable mileage rate for them. The best way to calculate this is by using a standard vehicle that can be utilized to conduct business operations.
An employer cannot control the distance and geographically-sensitive fuel and other additional costs, therefore they can control the type of car to ascertain the appropriate mileage reimbursement rate for the employee. Since reimbursing bigger and more expensive vehicles is more costly, you as an employer can ensure that vehicles are used for business purposes.
For example, this means that one cannot use an SUV truck to do business tasks such as meeting a client. Once you have chosen an appropriate vehicle such as a mid-range sedan, you can easily calculate the mileage rate by taking fuel, insurance, and wear and tear of the specific car segment into consideration.
Choose mileage tracking apps over manual employee reporting
Even if you have adopted the previous tips, you could still incur a heavy mileage cost without having a good mileage tracker in place. While employee reporting is a traditional form of mileage tracking, it is extremely time-consuming and prone to human error.
Sometimes employees do not mark it correctly and are later filling in the details with estimates, which could fiscally harm your company in the long run. If the employees think they are being paid unfairly, they’ll try to receive the compensation they think is fair by inflating the number of miles driven.
Instead of scrutinizing their every move, automate mileage tracking by using applications that use GPS and digital data entry to precisely record any business trip and capture mileage in real-time to bring down overall reimbursement costs.
FAQs on mileage reimbursement
There are better alternatives for the standard mileage rate. One approach is to separate the fixed costs (insurance, depreciation) from variable costs (gas, oil change, tires) and reimburse them accordingly. This is known as Fixed and Variable Rate Reimbursement (FAVR).
No, mileage reimbursement and reimbursing, in general, have nothing to do with income and refer to the compensation given to employees for carrying out business duties through out-of-pocket expenses.
Yes, an employer can refuse to pay mileage. However, this could lead to employee dissatisfaction. Therefore it’s recommended that business owners should offer mileage reimbursement as it also provides tax relief to the employees, wherever applicable.
Yes, mileage reimbursement can be used to negotiate a compensation package with an employee.
The Internal Revenue Service (IRS) issues a new standard mileage rate for employees using privately owned vehicles for business, medical, charitable, and moving purposes every year.
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