Does Mileage Get Taxed? Reimbursements vs. Deductions

Mileage, in a tax context, refers to vehicle operating costs for specific purposes with tax implications, such as business, medical appointments, or charitable activities. Whether mileage is taxed depends on factors like employer reimbursement or if the expense is incurred by a self-employed person. Understanding these distinctions is important for navigating personal and business finances accurately.

Mileage Reimbursements and Their Taxability

When an employee receives mileage reimbursement from an employer, its taxability depends on how the employer’s reimbursement plan is structured: accountable or non-accountable. Reimbursements made under an accountable plan are not considered taxable income to the employee.

For a reimbursement plan to qualify as accountable, it must meet three Internal Revenue Service (IRS) requirements. First, expenses must have a business connection. Second, the employee must adequately substantiate expenses to the employer within a reasonable period, providing details such as amount, time, place, and business purpose. This often involves mileage logs and receipts.

Third, any excess reimbursement over substantiated expenses must be returned to the employer within a reasonable time frame. If all three conditions are met, reimbursements are not reported as wages on Form W-2, and the employee avoids income, Social Security, or Medicare taxes on these amounts.

If an employer’s reimbursement arrangement fails any of these requirements, it is a non-accountable plan. Under a non-accountable plan, all reimbursements are taxable wages, included in gross income, reported on Form W-2, and subject to federal income tax withholding, Social Security, and Medicare taxes.

Employers often use the IRS standard mileage rate as a benchmark for accountable plan reimbursements; amounts at or below this rate are generally non-taxable if rules are followed. While employers can reimburse at a higher rate, only the portion up to the IRS rate remains non-taxable. Any amount above this rate may be treated as taxable income. Personal use of a company-provided vehicle, including associated mileage, is generally a taxable fringe benefit, added to wages and subject to income and employment taxes.

Deducting Mileage Expenses

Beyond reimbursements, individuals may be able to reduce their taxable income by deducting certain mileage expenses they incur. The ability to deduct mileage depends on an individual’s employment status and the purpose of the travel. Self-employed individuals, such as freelancers or independent contractors, can deduct ordinary and necessary business mileage expenses from their gross income.

For self-employed individuals, “ordinary” means the expense is common and accepted in their trade or business, and “necessary” means it is helpful and appropriate for their business. They have the option to calculate their deduction using either the IRS standard mileage rate for business or by tracking their actual expenses. Actual expenses can include costs like gasoline, oil, repairs, tires, insurance, vehicle registration fees, and depreciation or lease payments. Accurate record-keeping, such as mileage logs and receipts, is essential for substantiating these deductions.

For most W-2 employees, the ability to deduct unreimbursed employee business expenses, including mileage, has been significantly curtailed. Due to the Tax Cuts and Jobs Act (TCJA) of 2017, these expenses are no longer deductible as miscellaneous itemized deductions for tax years 2018 through 2025. This means that if an employee incurs mileage expenses for their job and is not reimbursed by their employer, they generally cannot claim a deduction for those costs on their federal income tax return.

Despite the changes for W-2 employees, certain other types of mileage remain potentially deductible as itemized deductions for all taxpayers, regardless of employment status. Mileage driven for medical care, for instance, can be included as part of medical expense deductions. This is deductible only to the extent that total medical expenses exceed a specific percentage of the taxpayer’s Adjusted Gross Income (AGI).

Similarly, mileage incurred while performing services for a qualified charitable organization is deductible. The charitable mileage rate is set by the IRS annually and is typically lower than the business mileage rate. This deduction is claimed as an itemized deduction on Schedule A (Form 1040). Finally, moving expenses, which can include mileage, are now deductible only for active-duty military members who move due to a permanent change of station.