Do I Have to Claim Mileage Reimbursement on My Taxes?

Mileage reimbursement is a common practice where employers compensate employees for using their personal vehicles for work-related travel. The way this reimbursement is structured determines whether you need to consider it for tax purposes. Understanding the type of plan your employer uses is important for managing your personal tax obligations.

Understanding Mileage Reimbursement Plans

Employers establish one of two primary types of mileage reimbursement arrangements recognized by the Internal Revenue Service (IRS): accountable plans or non-accountable plans. These distinctions are based on specific criteria that dictate the tax treatment of the reimbursed amounts. Properly classifying a plan is important for both employers and employees to ensure compliance with federal tax regulations.

An accountable plan must satisfy three IRS rules to qualify for favorable tax treatment. First, the expenses must have a business connection, meaning they are incurred while the employee performs services for the employer. This ensures that only legitimate business costs are being reimbursed, not personal expenses. For example, travel between a main office and a client’s location would qualify.

Second, the employee must adequately substantiate the expenses to the employer within a reasonable period. This substantiation requires providing detailed records, such as mileage logs, that include the date of travel, the destination, the business purpose of the trip, and the total mileage driven for each trip. Providing receipts for related costs like tolls or parking are also necessary to meet this requirement.

Third, the employee must return any excess reimbursement or allowance to the employer within a reasonable period. This means if an employee receives an advance for anticipated expenses and does not spend the full amount, the unspent portion must be repaid. A reasonable period means within 120 days after the expense is incurred or the advance is provided, or 60 days after the expenses are substantiated.

Conversely, a non-accountable plan is any reimbursement arrangement that fails to meet one or more of these three IRS criteria for an accountable plan. If an employer provides a mileage allowance without requiring employees to submit detailed expense reports, or if employees are not required to return unspent advances, the plan would be considered non-accountable. Such plans lack the necessary controls to ensure that reimbursements are solely for legitimate business expenses.

Tax Treatment of Mileage Reimbursements

The classification of a mileage reimbursement plan affects how the reimbursed amounts are treated for federal income tax purposes for the employee. The IRS provides clear guidance on these differences, impacting what appears on an employee’s annual Form W-2.

Reimbursements received under an accountable plan are not considered taxable income to the employee. Because these plans require substantiation of business expenses and the return of excess funds, the IRS views these reimbursements as the employer repaying the employee for business costs incurred on the employer’s behalf. These amounts are not reported as wages on the employee’s Form W-2, and they do not need to be “claimed” as income by the employee on their personal income tax return.

Reimbursements received under a non-accountable plan are considered taxable wages to the employee. Since these plans do not meet the IRS criteria for substantiation or return of excess, the IRS treats the payments as additional compensation rather than a repayment of business expenses. These amounts will be included in the employee’s gross income and reported in Box 1 of their Form W-2.

Amounts reported under a non-accountable plan are subject to federal income tax withholding, as well as Social Security and Medicare taxes (FICA taxes). This means that these reimbursements effectively become part of the employee’s taxable income and are subject to the same tax rules as their regular salary or wages. These amounts are “claimed” as part of the employee’s taxable income because they are already incorporated into the total wages reported on their W-2.

Reporting and Record Keeping for Mileage

Accurate reporting and record keeping are important for both employees and employers when it comes to mileage reimbursement. These practices ensure compliance with tax regulations and provide necessary documentation for potential IRS review. Proper documentation supports the classification of reimbursement plans and the correct tax treatment of expenses.

Employees must maintain detailed records for all business-related mileage. A mileage log is a common method, documenting each trip’s date, the starting and ending locations, the business purpose, and the total miles driven. This information is important for adequately substantiating expenses to the employer under an accountable plan, which then allows the reimbursement to be non-taxable.

Beyond mileage logs, employees should retain receipts for any related business expenses, such as tolls or parking fees. These receipts, along with the mileage records, provide proof of the costs incurred. Such record keeping is not only a requirement for accountable plans but also provides a strong defense in the event of an IRS audit.

Employers also have responsibilities regarding mileage reimbursement. They must correctly classify their reimbursement plans as either accountable or non-accountable based on IRS guidelines. Reimbursements made under a non-accountable plan must be reported as taxable wages on the employee’s Form W-2, ensuring that the appropriate income and payroll taxes are withheld.

Unreimbursed Mileage Expenses

Employees sometimes incur business mileage expenses for which they receive no reimbursement or only partial reimbursement from their employer. The tax treatment of these unreimbursed expenses has changed in recent years under federal law. It is important to understand the current rules regarding the deductibility of such costs.

The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the deduction for unreimbursed employee business expenses for federal income tax purposes. This suspension applies from January 1, 2018, through December 31, 2025. Most employees cannot deduct unreimbursed mileage expenses on their federal income tax return during this period, even if those expenses were ordinary and necessary for their job.

This federal suspension does not apply to self-employed individuals. Those who operate their own businesses can still deduct ordinary and necessary business mileage expenses from their gross income on Schedule C (Form 1040), Profit or Loss from Business. They use the standard mileage rate provided by the IRS or calculate actual expenses, provided they maintain adequate records.

While the federal deduction for unreimbursed employee business expenses is suspended, some states may still allow such deductions on their state income tax returns. Taxpayers should consult their state’s tax laws to determine if they can claim any portion of their unreimbursed mileage expenses at the state level. An employee cannot deduct expenses for which they were fully reimbursed under an accountable plan, as those amounts were already non-taxable.