Employees who use their private vehicles to fulfill work requirements are entitled to reimbursements. The mileage reimbursement rate sets the standards of reimbursements that employers must consider. There are a set of eligibility criteria that determines what kind of travel is reimbursable.
The rate at which employees are reimbursed changes every year, and the authority responsible for the revision is Internal Revenue Service (IRS). In this article, we have compiled the latest mileage reimbursement rate along with other pertinent information.
What is the Mileage Reimbursement Rate?
Private vehicles used for business, charitable, medical, or moving purposes are entitled to reimbursement. Defining mileage reimbursement rate is the rate at which employees receive compensation for using their personal vehicles to carry out business tasks.
Activities that are reimbursable include driving to:
- The bank for a business transaction
- Meet customers and clients
- Pick up office supplies
- Other business-related errands
The company must explicitly state what these reimbursable activities are in the travel policy.
What does the Mileage Reimbursement Change Every Year?
Coverage intensity of the mileage reimbursement rate is inclusive of all costs. The costs included are gas, insurance, maintenance, repair, and depreciation.
The IRS releases the standard mileage reimbursement rate every year. The main factor that compels a shift in rate each year is the fluctuation in gas prices. Additional contributors to the mileage rate are the fixed and variable costs of operating an automobile.
There is no law that mandates that rates facilitated by employers must match the rates provided by the IRS. But in case the company does decide to provide a reimbursement lower than the IRS guidelines, it makes itself vulnerable to lawsuits. If an employee decides to file a lawsuit claiming that their costs are closer to the IRS mileage rate as opposed to the one provided by the company, it can be more trouble than it’s worth.
Employers who choose to reimburse as per the IRS mileage rules do have a small advantage in employee retention.
After all, getting reimbursed for gas can only be an advantage for employees.
Some Key Points about the Standard Mileage Reimbursement
- Since the reimbursement is inclusive of all costs, employers reimbursing their employees are not obligated to pay other vehicle maintenance charges.
- When using a company vehicle, the onus of gas and maintenance lies with the company. In this case, clearly, this is no need for IRS mileage reimbursement.
Exceptions to the IRS Mileage Reimbursement
- Cost of parking and tolls
- Use of the vehicle for personal errands
- The mileage reimbursement rate is not subject to change based on geography
What is the Current Mileage Reimbursement Rate?
The mileage rate for 2021, applicable from January 1, 2021, are listed below:
- It is 56 cents per mile for business use. The rate fell by 1.5 cents when compared with the federal mileage rate from 2020.
- Medical usage is subject to 16 cents per mile driven. The same rate applies to medical or moving purposes. The rates went down by 1 cent in comparison with the 2020 mileage rate.
- Usage for service to charitable organizations is subject to 14 cents per mile. This mileage reimbursement rate is constant for both the years, i.e., mileage rates 2021 and 2020.
What is the Mileage Rate for 2020?
The standard mileage rates in 2020, as issued by the IRS, were more than the current year. There has been a fall in 2 categories of IRS mileage reimbursement when compared with the rates from 2019. The IRS shifted the rate considering the hiked gas prices. Let us take a quick tour of the mileage rate.
- 57.5 cents per mile for business miles as opposed to 58 cents in the year 2019.
- Medical or moving purposes rate at 17 cents per mile, a fall from 20 cents in the year 2019.
- Lastly, the same rate of 14 cents per mile driven in service of charitable organizations, as it was in 2019.
IRS Mileage Rules
A standard federal rate of reimbursement is released every year, acting as a guideline. Complying with the law and the rules, employees can choose to reimburse at a rate both higher and lower than the federal average rate.
The cost of maintenance and gas varies from one state to another, and choosing a rate based on location only makes sense. When paid below the federal average rate, employees have an advantage under the Fair Labor Standards Act “kickback rule.” This advantage is subject to employees who make close to or below the minimum wage.
- When employers go by a rate below the IRS rate, employees get the benefit of claiming the remaining amount on their tax return.
- On the other end of the spectrum, for higher reimbursements, the exceeding amount is considered as taxable income for employees.
Mileage Reimbursement Calculation
Lump-Sum Reimbursement Method
The employer and employee draw an agreement in advance under this method. Here, employers pay the employees a fixed sum each payroll cycle. This can be based on an estimate of distance traveled in the past but isn’t subject to change basis the change in distance traveled.
Companies may choose to provide an additional car allowance or gas stipend in the form of a per diem payment.
Actual Expenses Method
Here the business must track the expenses incurred by the employee for official purposes. This cost isn’t that simple to calculate. It includes fuel, repairs, insurance, maintenance, and depreciation.
It isn’t enough to simply multiply the reimbursement rate with the total distance covered by the employee for official needs. The employee must give the exact expenses for running their vehicles, and the business must make the allocation between business and personal use.
Although this is the most accurate method for calculating mileage reimbursement for employees, it can be inordinately time-consuming and expensive.
Mileage Reimbursement Rate Payment Alternatives
Significant IRS mileage reimbursement method employers must be apprised of is via regular wages or separate payment. Decision-making rests upon HR regarding how they wish to reimburse mileage.
One method is to release the payment alongside their regular wages. This would spare the hassle of multiple communications and facilitates ease in record-keeping. Contrarily, employers can choose to release separate payment and deposit it directly or draw an independent cheque.
Mileage Reimbursement Rate Management
Managing mileage reimbursement, there are three possible courses of action.
- When employers choose to abide by the mileage reimbursement rate and reimburse in full. Here, there shall be no deduction for the employee.
- When employers choose to go below the mileage reimbursement rate and reimburse partially. Here, the employee can deduct the amount that is less.
- When employers choose to ignore the mileage reimbursement rate. Here, the employee can deduct the entire amount from the IRS Rate.
In case employees choose to claim for a mileage rate deduction, they have some obligations to fulfill. Within the process, the employees need to itemize their expenses on their annual tax form. Also, there is an eligibility criterion for the mileage rate deduction. The criterion states, the mileage costs must exceed 2% of the employee’s Adjusted Gross Income (AGI). Drafting the paperwork requires the employees to have a significant number of business tours under their hood.
Employee Mileage Reimbursement Law
The law streamlines some terms and conditions concerning the employers, and it also includes the California Employee Mileage Reimbursement Law.
When employers choose to go below the federal average, they need to back up their decision. The law upholds a term for such employers, asking for proof which states the employee’s actual cost and vehicle wear-and-tear fall below the national average.
Also, there is a term quite similar to the one briefed above for the employee. If employees claim that they deserve a pay higher than the federal average, they need to provide proof of their expenses as well.
The mileage reimbursement rate exists to benefit both the parties, i.e., the employees and the employers. Also, paying the employees abiding with the mileage reimbursement rate or above is the easiest way to avoid expensive lawsuits. Such lawsuits are generally difficult to win. Let’s say your employee files a claim that their expenses are at par with the federal mileage rate. You have to prove your decision of payment at a lower rate with specific evidence. It isn’t worth the marginal reduction in reimbursement costs.
Benefits of Providing a Mileage Reimbursement
There are no mandatory norms attached with reimbursing mileage at the federal mileage rate. However, this reimbursement could turn out as a utility for the employers.
Mileage reimbursement for employees increases satisfaction levels among employees. The company would source another indirect benefit sourced from employee satisfaction – high productivity.
When employees choose to release the mileage reimbursement, employees would be happy to carry all future errands. No job or activity would be put to hold since employees won’t have a problem traveling for work.
Additional Monetary Procurement
A monetary benefit of business mileage deduction is another benefit employers can enjoy. This deduction is a tax break that owners of small businesses can claim depending on business miles driven.
Current Mileage Reimbursement
Though not mandatory, keeping a check on IRS mileage rules would do a lot more than good. The right choice here would be to establish a Mileage Reimbursement Policy within the Travel Policy of your company.
This policy should highlight:
- Activities that are reimbursable
- The mileage rate for the organization; which should at least match the federal rate
- How the employee must submit travel expenses with proof
- Calculation method for mileage reimbursement
- How the business will reimburse the employee