Are You Taxed on Mileage Reimbursement?

Mileage reimbursement is a common practice for employees using personal vehicles for business travel. The Internal Revenue Service (IRS) has specific rules determining whether these reimbursements are considered taxable income. Understanding these regulations helps both employees and employers ensure proper tax compliance and avoid unexpected tax liabilities.

Understanding Mileage Reimbursement Taxability

The tax treatment of mileage reimbursement depends on whether the employer’s arrangement qualifies as an “accountable plan” or a “non-accountable plan” under IRS guidelines. Payments under an accountable plan are not included in an employee’s gross income and are non-taxable. Conversely, reimbursements provided under a non-accountable plan are considered taxable wages.

An accountable plan requires employees to substantiate business expenses and return any excess reimbursement. This links payments directly to actual, documented business costs. A non-accountable plan does not require employees to provide detailed expense reports or return unused funds. Such payments are treated as additional compensation, similar to regular wages, and are subject to taxation.

Requirements for Non-Taxable Reimbursement

For mileage reimbursement to be non-taxable, an employer’s plan must meet three specific IRS requirements. First, expenses must have a business connection, meaning they were incurred while the employee was performing services for the employer. The reimbursement must be for deductible business expenses that are ordinary and necessary for the job.

Second, the employee must adequately account for these expenses to the employer within a reasonable period. This involves providing documentation that specifies the amount, time, place, and business purpose of each expense. The IRS considers 60 days after the expense is incurred as a reasonable time for substantiation.

Third, the employee must return any excess reimbursement or allowance not substantiated within a reasonable timeframe. The IRS considers 120 days after the expense is incurred as a reasonable period for returning excess funds. Failure to meet any of these three requirements means the reimbursement plan will be treated as a non-accountable plan, making the payments taxable.

When Mileage Reimbursement Is Taxed

When mileage reimbursements are classified as a non-accountable plan, they are considered taxable wages to the employee. These amounts are included in the employee’s gross income and reported on their Form W-2.

These taxable reimbursements are subject to federal income tax withholding, as well as Social Security and Medicare taxes (FICA taxes). The Tax Cuts and Jobs Act of 2017 suspended the deduction for unreimbursed employee business expenses, including mileage, for tax years 2018 through 2025. Therefore, employees currently cannot deduct these expenses on their personal tax returns.

Essential Mileage Record Keeping

Proper record-keeping is essential for both employees and employers to ensure correct tax treatment of mileage reimbursements. Employees should maintain detailed records for each business trip. This includes the date, destination, business purpose, and either starting/ending odometer readings or total miles driven. Various methods, such as manual logs or tracking applications, can capture this information. This documentation is essential for substantiating expenses under an accountable plan.

Employers also need to keep thorough records of their reimbursement policies and employee submissions to demonstrate compliance with IRS regulations. Many employers utilize the IRS standard mileage rate. For 2025, the standard business mileage rate is 70 cents per mile. Reimbursement up to this rate under an accountable plan is non-taxable. If an employer reimburses an amount exceeding this rate, the excess portion may become taxable unless the employee provides substantiation of actual expenses.