Does Mileage Count as Income? Reimbursements vs Deductions

Mileage can be a significant cost for individuals and businesses, and understanding its tax implications is important. Whether mileage counts as income depends largely on the circumstances surrounding its use and reimbursement. The treatment varies considerably for employees receiving reimbursements compared to self-employed individuals or businesses claiming deductions.

Mileage Reimbursements for Employees

Mileage reimbursements for employees are generally not considered taxable income if they are part of an “accountable plan” that meets Internal Revenue Service (IRS) requirements. An accountable plan requires a business connection, adequate substantiation, and the return of any excess reimbursement within a reasonable timeframe. Employees must provide details such as date, destination, business purpose, and total miles driven to their employer.

If a plan does not meet these criteria, it is a “non-accountable plan.” Reimbursements under a non-accountable plan are considered taxable income, included in the employee’s gross wages on Form W-2 and subject to withholding and payroll taxes. For example, if an employer provides a flat monthly mileage allowance without requiring substantiation, that allowance would be taxable to the employee. Any reimbursement exceeding the IRS standard mileage rate, even under an otherwise accountable plan, is also considered taxable income for the employee.

Mileage Deductions for Self-Employed Individuals and Businesses

For self-employed individuals, independent contractors, or business owners, mileage is a deductible business expense. Deducting business mileage reduces net income, which in turn lowers their overall tax liability.

There are two primary methods for calculating this deduction: the standard mileage rate and the actual expense method. The standard mileage rate, set annually by the IRS, offers a simplified way to calculate the deduction by multiplying business miles driven by a set rate. For 2025, the business standard mileage rate is 70 cents per mile, covering costs like gas, oil, maintenance, insurance, and depreciation. Parking fees and tolls incurred for business purposes can be deducted in addition to the standard mileage rate.

Alternatively, the actual expense method involves tracking and deducting all real costs associated with operating the vehicle for business. This method requires meticulous record-keeping of expenses such as gas, oil, repairs, tires, insurance, and depreciation. The deductible amount is based on the percentage of total mileage driven for business purposes.

It is important to distinguish between deductible business mileage and non-deductible commuting mileage, which is travel between a home and a regular place of work. Travel between different workplaces or to client sites typically qualifies as business mileage.

Required Mileage Records

Accurate record-keeping is fundamental for substantiating mileage, whether for employee reimbursements or self-employed deductions. The IRS requires specific details for each business trip to validate claims, including the date of the trip, the starting point and destination, the business purpose of the travel, and the total miles driven for that trip.

Annual odometer readings at the beginning and end of the tax year are highly recommended to support total mileage claims. Maintaining contemporaneous records, meaning logging trips at or near the time they occur, is crucial for IRS compliance. Common methods for tracking mileage include traditional paper logbooks, spreadsheets, or specialized smartphone applications designed to automate the process. Proper documentation helps ensure that mileage is treated correctly for tax purposes and can prevent issues during an audit.