What is an IRS mileage rate?

The IRS mileage rate refers to the amount a taxpayer can deduct per mile driven for business or work-related travel. The deduction considers both the fixed and variable costs of driving the car. As opposed to deducting actual expenses, taxpayers deduct the mileage rate since it includes predetermined costs. The IRS determines mileage rates based on tuel, maintenance, registration and vehicle insurance.  costs

Trying to predict what could affect the IRS mileage rate is tricky because some external factors influence the above criteria. Inflation and interest rates can increase cthe ost of living expenses and make it more expensive to repair a vehicle, while geopolitics can impact fuel prices.

What are mileage reimbursements?

Mileage reimbursements are a form of compensation employees receive for using their personal vehicle for business. For example, you can reimburse your employees for driving to meet customers or clients or driving to the bank to make a deposit for your store.

You may or may not have to reimburse your employees, depending on the state you live in and whether they receive minimum wage. Keep in mind that the Fair Labor Standards Act (FLSA) states that if your employee’s work-related travels cause their adjusted earnings to dip below the minimum wage, employers need to make up the difference.

Related: The Fair Labor Standards Act (FLSA): What to Know

Benefits of mileage reimbursements

You might not need to provide mileage reimbursements for your employees if you operate in states that don’t require it. However, this doesn’t mean it wouldn’t benefit you to still do so. Reimbursements qualify as deductible business expenses, which can lower your tax bill, and they benefit your employees because they won’t have to use their out-of-pocket cash for their work-related driving. This often helps with employee retention rates.

Related: How to Reduce Employee Turnover

2023 mileage rates

Every year, the IRS determines a new standard mileage reimbursement rate. Although the mileage rate changes based on inflation, it’s important to consider the most up-to-date information.

The 2023 mileage rates are as follows:

• Regular business driving: 65.5 cents per mile
• Medical or moving work: 22 cents per mile
• Charity-related work: 14 cents per mile

Although these rates are recommended, you can adjust your employee’s reimbursement as you wish. If you use a rate that surpasses the federal rate, the excess amount becomes taxable for your employees. To use any of these rates, simply multiply the current rate by the number of miles your employee traveled.

Related: Small Business Fuel and Fleet Cards

Tips for reimbursing employees

There are many reasons for offering mileage reimbursement. If your business offers it to your workers, the following tips can help you ensure your payments are fair and accurate:

• Use expense-tracking software: Using expense-tracking software ensures you’re reimbursing your employees correctly based on the rate you’ve set. It also eliminates the need to calculate everything by hand. Set a rate and have your employees enter their mileage to determine their payment.
• Make sure you’re reimbursing them correctly: When you calculate reimbursements, ensure you’re only reimbursing employees for driving to and from work duties. This doesn’t include their regular commute to and from work. Verify this information through the documentation they provide.
• Ask for a mileage log, receipts and relevant documentation: Make sure you receive detailed records from your employees regarding their work-related driving habits. This ensures correct reimbursement payments.
• Recommend a mileage tracking application: There are several mileage tracking applications that offer assistance to your employees. Using an application helps them receive more accurate measurements.

Alternatives for the standard mileage rate

You don’t need to stick to the standard mileage rates to reimburse your employees.

Here are some alternatives to using the standard rates:

• Fixed and variable rate (FAVR) reimbursement program: With FAVR, you pay a fixed amount to cover the employee’s fixed costs for insurance. You also pay a cents-per-mile rate to cover an employee’s variable costs, such as gas, depreciation and maintenance.
• Flat car allowance: Instead of using a set rate, employers give their employees a flat car allowance that covers related expenses. For example, rather than using the standard mileage rate, give your employees a figure such as $400 per month to cover gas, tires and the wear and tear on their vehicle.
• Offer a company vehicle: Not only does this allow you to have more control over maintaining the vehicle, but it can be a valuable perk for top-tier talent. If you go this route, keep in mind that you need to insure your employees.

IRS Mileage Rate FAQs

Why would I want to offer my employees more mileage reimbursement than the federal rate?

The most logical reason to offer your workers a higher reimbursement rate is employee retention. You may be competing with a rival that’s attempting to lure your employees away, and you’ll want to provide an extra perk to keep your staff from leaving for greener pastures.

What if employees aren’t keeping accurate mileage logs?

It can be difficult to reimburse employees accurately if they’re not cooperating, but it’s also in their best interest to keep logs of each trip. The traditional method of recording mileage was to create a log with the odometer reading at the start and end of each trip. However, it can be extremely tedious and many of your employees may forget to do this. Mileage apps are extremely useful because they do all the work for you. Your employees just need to download the app and use it whenever they’re using their car for business. It tracks them via GPS to determine their distance traveled. Another alternative is to offer a flat car allowance, so you don’t need to keep mileage logs at all.

How are business-related expenses defined?

It’s important to make a clear distinction between business-related travel and personal travel. For example, your employees can’t claim the distance from home to work as a business expense. They also can’t claim any mileage during a break or time off throughout the day. If you have an employee who must meet with a series of clients throughout the day, you only start reimbursing them from the moment they leave your office. The mileage from a client appointment to a restaurant to grab some food and then to the next appointment is exempt. Reimbursement ends once your employee either finishes their last appointment or makes it back to your office.