How to Reimburse Employees for Mileage

Reimbursement for mileage is a common practice for businesses whose employees use personal vehicles for work-related travel. Properly managing mileage reimbursement helps maintain accurate financial records and supports compliance with tax regulations. Businesses frequently require employees to travel for various work purposes, from client meetings to site visits. Establishing a clear and compliant reimbursement process ensures fair compensation for employees’ business-related vehicle use.

IRS Accountable Plan Requirements

For mileage reimbursements to be non-taxable to the employee and deductible for the employer, they must be part of an “accountable plan” as defined by the Internal Revenue Service (IRS). An accountable plan requires adherence to specific rules to distinguish legitimate business expenses from taxable income.

The first requirement for an accountable plan is a business connection, meaning the expenses must be incurred while performing services as an employee of the business. These expenses must directly relate to the employer’s trade or business. For instance, mileage for a sales representative visiting clients meets this criterion.

Second, employees must adequately substantiate the expenses within a reasonable period. This involves providing detailed records of the mileage, including the date, destination, and business purpose of each trip. Without proper documentation, the reimbursement may be treated as taxable wages.

The third requirement dictates that employees must return any excess reimbursement or allowance within a reasonable time. If an employee receives an advance that exceeds the substantiated expenses and does not return the difference, the unreturned amount becomes taxable income.

The IRS standard mileage rate is a common method for reimbursement under an accountable plan, providing a set rate per mile driven for business. For 2025, this rate is 70 cents per mile for business use. This rate covers the costs of operating a vehicle, including depreciation, fuel, oil, insurance, and maintenance.

Calculating and Documenting Business Mileage

Accurate calculation and documentation of business mileage are components of an accountable reimbursement plan. Employees must maintain detailed records to substantiate their travel expenses and meet IRS requirements.

Each entry in a mileage log should include specific information: the date of the trip, the starting and ending locations, the total miles driven, and the business purpose of the travel. Recording starting and ending odometer readings for each trip provides verifiable data. This level of detail helps prevent discrepancies and supports the legitimacy of the claimed mileage.

Employees have several methods for tracking mileage, ranging from traditional paper logs to digital solutions. Manual mileage logs are simple notebooks where details are handwritten for each trip. Spreadsheet templates offer a more organized approach, allowing for easy calculation and categorization of mileage data.

Mobile applications designed for mileage tracking can automate much of this process by using GPS to record distances and allowing users to categorize trips with minimal effort. Consistent record-keeping helps ensure that all business-related mileage is captured and documented.

Differentiate between deductible business mileage and non-deductible commuting mileage. Travel between an employee’s home and their regular place of work is non-deductible commuting. However, travel from a regular workplace to a temporary work location, or between two different work locations, qualifies as business mileage.

Establishing a Reimbursement Program

Implementing a formal mileage reimbursement program involves several procedural steps for employers. The first step is to develop a clear, written company policy that outlines all aspects of mileage reimbursement. This policy should specify who is eligible for reimbursement, such as employees using personal vehicles for business travel.

The policy must detail the submission procedures, including the required documentation and the format for mileage logs or expense reports. It should also establish clear approval processes, identifying the individuals or departments responsible for reviewing and authorizing reimbursement requests. The policy should define reasonable timelines for expense submission and reimbursement disbursement.

Employees submit their documented mileage through expense reports, company forms, or online portals. These submissions should include detailed records, such as dates, destinations, business purposes, and miles driven for each trip.

The employer’s role involves a thorough review of submitted documentation to verify accuracy and compliance with both the company’s policy and IRS regulations. This review process helps identify any missing information or inconsistencies before reimbursement is issued. Regular audits of submitted mileage can help maintain the program.

Once approved, the reimbursement amounts are processed and disbursed to the employees. This can be done through various channels, such as integration with payroll systems, direct deposit into the employee’s bank account, or issuance of a separate check.

Tax Considerations of Reimbursement Methods

The tax implications of mileage reimbursement differ depending on whether the arrangement qualifies as an accountable plan or a non-accountable plan. When reimbursements are made under an accountable plan, they are not considered taxable income to the employee.

For the employer, reimbursements made under an accountable plan are treated as deductible business expenses. This reduces the employer’s taxable income. Proper classification of these reimbursements helps both parties avoid unexpected tax liabilities.

In contrast, if a reimbursement arrangement fails to meet the requirements of an accountable plan, it becomes a non-accountable plan. This can occur if the employee does not adequately substantiate expenses, fails to return excess reimbursements within a reasonable time, or if the expenses lack a business connection. Such non-compliance changes the tax treatment of the reimbursement.

Under a non-accountable plan, the entire reimbursement amount is considered taxable wages to the employee. This amount must be included in the employee’s gross income and is subject to all applicable payroll taxes, including income tax withholding, Social Security, and Medicare taxes. The employer must report these amounts on the employee’s Form W-2.

While the employer may still deduct the expense, it is treated differently on tax forms, often categorized as wages rather than a direct reimbursement. The employer also pays their share of Social Security and Medicare taxes on these amounts. Adherence to accountable plan rules helps minimize tax liabilities for both employees and employers.