Do You Have to Claim Mileage Reimbursement on Taxes?

Mileage reimbursement is a common practice for individuals who use their personal vehicles for business purposes. This compensation helps cover the costs associated with operating a vehicle for work-related travel. Understanding how these reimbursements are treated for tax purposes is important for both employees and employers to ensure compliance with tax regulations.

Understanding Mileage Reimbursement Taxability

Mileage reimbursements are not always considered taxable income. Their taxability depends on whether the employer’s reimbursement arrangement qualifies as an “accountable plan” or a “non-accountable plan” under tax regulations. Reimbursements under an accountable plan are generally not subject to income tax for the employee. Conversely, non-accountable plan reimbursements are treated as taxable wages.

This distinction affects how the reimbursement is reported to the tax authority and whether the employee owes taxes. The IRS sets criteria for accountable plans. If a reimbursement exceeds the IRS standard mileage rate, the excess amount may be considered taxable income, even if the plan qualifies as accountable.

Accountable Reimbursement Plans

An accountable reimbursement plan allows employers to reimburse employees for business expenses without the reimbursement being taxable income. For a plan to qualify as accountable, it must satisfy three requirements. First, expenses must have a business connection, meaning they are incurred while performing services for the employer.

Second, the employee must adequately account for these expenses within a reasonable period. This involves submitting an expense report with supporting documentation, such as receipts, within 60 days. Third, any excess reimbursement that is not substantiated must be returned to the employer within a reasonable period, often within 120 days.

Reimbursements under an accountable plan are not reported as wages on an employee’s Form W-2. This means employees do not pay income tax, Social Security, or Medicare taxes on these amounts. If an employer’s reimbursement rate aligns with or is less than the IRS standard mileage rate, and all accountable plan criteria are met, the reimbursement is non-taxable.

Non-Accountable Reimbursement Plans

A non-accountable reimbursement plan fails to meet one or more requirements of an accountable plan. This includes situations where there is no business connection for the expense, the employee does not adequately account for expenses, or the employee is not required to return excess reimbursements. If an employer provides a flat allowance without requiring documentation, this would fall under a non-accountable plan.

All amounts paid under a non-accountable plan are treated as taxable wages. These amounts are subject to federal income tax withholding, Social Security, and Medicare taxes, just like regular salary or wages. Consequently, these reimbursements are included in the employee’s gross wages on their Form W-2.

Non-accountable plans affect both employees and employers. Employees see an increase in their taxable income, leading to a higher tax liability. Employers face increased payroll tax liability and withholding obligations on these amounts, as they are considered compensation.

How Taxable Reimbursements Are Reported

When mileage reimbursements are taxable, they are included in the employee’s gross income and reported on their tax documents. If a reimbursement is made under a non-accountable plan or if an excess amount from an accountable plan is not returned, this taxable portion is reported in Box 1 (Wages, tips, other compensation) of the employee’s Form W-2.

This inclusion in Box 1 means the amount is subject to federal income tax, Social Security, and Medicare taxes. While amounts up to the IRS standard mileage rate under an accountable plan may be reported in Box 12 of Form W-2 with Code L, any portion that is considered taxable will still appear in Box 1. Employees then report this amount as income on their federal income tax return, such as Form 1040.

Essential Mileage Record Keeping

Maintaining accurate and detailed records for business mileage is essential for tax compliance and ensuring reimbursements remain non-taxable. These records serve as substantiation for the business use of a vehicle, a requirement for accountable plans. Without proper documentation, reimbursements may be reclassified as taxable income.

An IRS-compliant mileage log should include specific information for each business trip:
Date of the trip
Starting point and destination
Business purpose of the trip
Total miles driven

Recording starting and ending odometer readings for the year can further support overall mileage claims. Keeping these records contemporaneously, meaning at or near the time of the trip, is recommended.