How to Handle 1099-NEC Mileage Reimbursement
For businesses and contractors, the structure of a mileage reimbursement plan dictates its tax treatment, 1099-NEC reporting, and the ability to deduct expenses.
Businesses use Form 1099-NEC to report payments to independent contractors, which often includes mileage reimbursement for using a personal vehicle for business travel. The tax treatment for this reimbursement depends on the structure of the payment arrangement between the business and contractor. This structure determines if the payment is a non-taxable reimbursement or taxable compensation.
Accountable vs. Nonaccountable Plans
The Internal Revenue Service (IRS) defines two types of reimbursement arrangements: accountable and nonaccountable plans. For a mileage reimbursement arrangement to be an accountable plan, it must satisfy three conditions. First, the travel expenses must have a clear business connection. Second, the contractor must provide adequate substantiation for the expenses to the business within a reasonable period.
Adequate substantiation for mileage involves a detailed log showing the dates of travel, starting and ending locations, total miles driven, and the business purpose of each trip. A reasonable period for substantiation is generally within 60 days of the expense. The third requirement is that the contractor must return any reimbursement amount exceeding substantiated expenses within a reasonable time, usually within 120 days.
If an arrangement fails to meet one or more of these conditions, it is classified as a nonaccountable plan. For instance, if a business pays a contractor a flat monthly amount for mileage, such as $200, without requiring documentation of actual miles driven, this is a nonaccountable plan. The payment is not directly tied to substantiated business use.
Reporting Requirements for Businesses
The classification of the reimbursement plan dictates a business’s reporting obligations on Form 1099-NEC. When mileage reimbursements are made under an accountable plan, the payments are not considered compensation. Consequently, these amounts are not reported on Form 1099-NEC. The reimbursement is treated as a repayment for business expenses.
Payments made under a nonaccountable plan are treated as taxable compensation to the independent contractor. The business must include the full amount of the mileage reimbursement in the total compensation reported in Box 1 of Form 1099-NEC. The reimbursement is combined with any other fees for services, and the total is reported as a single figure.
Tax Implications for Independent Contractors
The tax consequences for an independent contractor mirror the reporting rules for the business. If a contractor receives mileage reimbursement under an accountable plan, the money is not considered taxable income. Because the reimbursement is excluded from income, the contractor cannot then deduct the associated mileage as a business expense on their tax return.
When reimbursement is received under a nonaccountable plan, the full amount is included in the contractor’s gross income and must be reported on Schedule C (Form 1040). Since this payment is taxable income, the contractor is then entitled to deduct their business-related vehicle expenses. This deduction can be calculated using either the standard mileage rate, which for 2025 is 70 cents per mile, or the actual expense method.
The actual expense method involves tracking all vehicle-related costs, such as gasoline, oil changes, insurance, and depreciation, and allocating them based on the percentage of business use. Regardless of the method chosen, the contractor must maintain detailed records to support the deduction claimed.