What is an IRS mileage rate?
Set by the IRS, the mileage rate refers to the amount a taxpayer can deduct per mile driven for business or other deductible purposes. When it comes to using a vehicle for business, 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. Essentially, the IRS determines mileage rates based on the cost of fuel, maintenance, registration and vehicle insurance.
What are mileage reimbursements?
Mileage reimbursements refer to the 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 for them driving to the bank to make a transaction.
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) says if your employee’s work-related travels dip their earnings below the minimum wage, employers need to make up the difference.
Benefits of mileage reimbursements
Though you may not have to reimburse your employees, doing so comes with several benefits. For example, since reimbursements qualify as a deductible business expense, you typically don’t have to pay as much in taxes. Reimbursements also benefit your employees as they won’t have to use their out-of-pocket cash for their work-related driving, increasing employee retention in the process.
Related: How to Reduce Employee Turnover
2022 mileage rates
Every year, the IRS determines a new standard mileage reimbursement rate for tax purposes. Though the mileage rate changes based on inflation, it’s important to consider the most up-to-date rate. Here are the 2021 rates:
- Regular business driving: 56 cents per mile.
- Medical or moving work: 16 cents per mile.
- Charity-related work: 14 cents per mile.
Though these rates are recommended, you can adjust your employee’s reimbursement more or less based on your own preferences. 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
Whether you’re reimbursing your employees for traveling to and from a conference or your various offices, consider these tips to help determine their payment:
- Use an 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
Apart from the standard mileage rate, consider using other rates to reimburse employees. Here are some alternatives:
- Fixed and variable rate (FAVR) reimbursement program: With FAVR, you pay a fixed amount to cover the employee’s fixed costs for things like depreciation or insurance. You also pay a cents-per-mile rate to cover an employee’s variable costs such as gas and maintenance.
- Flat car allowance: Rather than 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.