Do You Have to Pay Taxes on Mileage Reimbursement?

Mileage reimbursement is a common practice where employers compensate employees for the costs incurred when using a personal vehicle for business-related travel. This compensation helps cover expenses such as fuel, maintenance, and vehicle depreciation. The taxability of these reimbursements depends on specific Internal Revenue Service (IRS) regulations and how an employer’s reimbursement plan is structured.

Conditions for Non-Taxable Reimbursement

Mileage reimbursements are not considered taxable income when they are part of an “accountable plan” established by the employer. An accountable plan must meet three specific IRS requirements to ensure that reimbursements are tax-free for the employee. First, the expenses must have a business connection, meaning they were incurred for legitimate business purposes while performing services for the employer. This specifically excludes personal commuting expenses between an employee’s home and primary work location.

Second, employees must provide adequate substantiation for their expenses. This requires keeping detailed records, such as mileage logs, that document the date, destination, business purpose, and miles driven for each trip. Receipts or other supporting documentation are also often required for other reimbursed expenses.

Third, any reimbursement that exceeds the substantiated expenses must be returned to the employer within a reasonable timeframe. Typically, this means returning excess amounts within 120 days after the expense was paid or incurred, or substantiating expenses within 60 days of their occurrence. If these conditions are met, the reimbursement is not considered part of the employee’s wages and is exempt from income tax withholding, Social Security (FICA), and Medicare taxes.

Many employers use the IRS standard mileage rate as a benchmark for non-taxable reimbursements. For instance, the business mileage rate for 2025 is 70 cents per mile. Reimbursements at or below this rate, when part of an accountable plan, are not considered taxable income. This rate aims to cover the average costs of operating a vehicle, including fuel, maintenance, insurance, and depreciation.

When Reimbursement Becomes Taxable

Mileage reimbursements become taxable when they do not meet the requirements of an accountable plan, falling instead under a “non-accountable plan.” This occurs if any of the three conditions for an accountable plan are not satisfied. For example, if an employer provides a flat monthly allowance for mileage without requiring employees to provide documentation for their expenses, or if employees are not required to return any unspent advances, the arrangement is considered a non-accountable plan.

Under a non-accountable plan, the entire amount of the reimbursement is treated as additional wages or compensation to the employee. This means the full reimbursement is subject to federal income tax withholding, as well as Social Security and Medicare taxes. Unlike reimbursements under an accountable plan, which are tax-free for the employee, non-accountable reimbursements increase an employee’s gross income.

Another instance where mileage reimbursement can become taxable is when an employer reimburses at a rate higher than the IRS standard mileage rate. In such cases, the amount exceeding the IRS rate is considered taxable income to the employee. For example, if an employer reimburses at 75 cents per mile when the IRS rate is 70 cents, the additional 5 cents per mile is taxable. This excess portion is subject to the same tax implications as wages.

Reporting Reimbursements

The way mileage reimbursements are reported for tax purposes depends on whether they fall under an accountable or non-accountable plan. Non-taxable reimbursements, those made under a compliant accountable plan, are not reported on the employee’s Form W-2. Since these amounts are not considered taxable income, they do not need to be included in Box 1 (Wages, tips, other compensation) of the W-2.

Conversely, taxable reimbursements, which occur under a non-accountable plan or when the reimbursement exceeds the IRS standard rate, are included in the employee’s gross wages. These amounts are reported in Box 1 of Form W-2 and are subject to income tax withholding and FICA taxes. If a reimbursement exceeds the IRS standard mileage rate, the non-taxable portion (up to the IRS rate) may be reported in Box 12 of Form W-2 with Code L, while the excess, taxable portion is included in Box 1.

Employees should review their Form W-2 to understand how their mileage reimbursements were treated by their employer. If an employee believes a non-taxable reimbursement was incorrectly included in their wages on Form W-2, they should communicate with their employer to request a corrected W-2.