A guide to corporate mileage reimbursement policies
- Corporate mileage reimbursement enables taxpayers to claim back money when using personal vehicles, but the system is complex. Here we explain how it works for both employees and business owners.
- Each country has its own standard mileage rate. We look at how the IRS and other revenue agencies calculate these benchmark figures.
- The article provides specific instructions on what both employees and independent contractors must do to claim mileage reimbursement.
We’re hitting the road more than ever before. In the U.S. alone, motorists now drive more than 3 trillion miles every year, and a huge chunk of this travel is for work. As we slowly return to normality after the coronavirus pandemic and begin holding meetings and client visits again, it’s crucial that employers have a sound company mileage reimbursement policy in place.
Mileage reimbursement can benefit both employees and business owners. For employees, it provides compensation when they put their personal vehicle to business use. At the same time, it provides companies with tax-deduction benefits.
However the rules on mileage reimbursement can be more complicated than other forms of business travel, which merely require employees to provide a receipt when filing their moving expenses. The sheer number of articles on the internet shows how challenging this topic can be.
In this guide we will provide a definitive overview of what the system entails, so employers know exactly how to reimburse employees for mileage and their people know how to claim properly when using their own vehicles for business driving.
Ok, so how does mileage reimbursement work?
In the U.S., UK and many other countries, business expenses are usually tax-deductible. When taxpayers travel by plane, train or taxi, they can claim the money back and their employer can claim tax relief.
Corporate mileage reimbursement schemes extend this benefit to personal vehicles. When employees use their personal car, van or bike for day-to-day business activities, they can claim back the cost without paying income tax.
An important point to note here is that mileage reimbursement isn’t designed to cover commuting to and from work. It is designed to cover the journeys that employees make during work, specifically those with a business purpose (you can’t claim travel expenses for going to the gym or picking up food at lunchtime!)
The Internal Revenue Service (IRS), which regulates mileage reimbursement in the U.S., states that to qualify as a business journey, a trip must be 1) ordinary, which means it is common or accepted in the industry, and 2) necessary, which means it is appropriate or helpful to the company.
These can include a variety of trips, including:
- To go and see a client
- To attend a meeting
- To go and see another employee or manager
- To go and collect business supplies
- To run an errand on behalf of the company
The mileage reimbursement regulations also state that the majority of the journey has to be work-related. So if you stop off to pick up some office equipment on the way back from visiting your parents, that doesn’t count.
It’s important to stress the importance of good record-keeping at this point. In the U.S., the IRS expects employees to maintain a mileage log, with four distinct details:
- The time and date of each journey.
- The total distance covered (odometer readings can be useful for noting business miles).
- The destination of each drive.
- A brief description of the purpose.
The mileage log can be written down with pen or paper, or on a computer. The important thing is that they are written down.
Does an employer have to pay mileage?
In most instances…no. Most countries have refrained from making mileage reimbursement a formal requirement.
In the U.S., there is only one instance when an employer is federally required to pay mileage reimbursement to employees: when failure to do so will mean that their earnings dip below the minimum wage. Otherwise, there is no Federal law that obliges companies to compensate for mileage (although several states have passed their own laws, including California and Massachusetts).
The majority of employers will pay mileage even though they don’t have to, however. If they choose not to reimburse an employee for using their private vehicle, or indeed for any business expenses, they risk losing staff and damaging their brand.
How is mileage reimbursement calculated?
When paying mileage reimbursement at the end of the year, an employer doesn’t need to work out the value of each journey or the amount the employee has spent. They can simply multiply each employee’s total number of miles by their country’s approved corporate mileage rate, which is also known as the business rate and most commonly as the standard mileage rate.
The standard mileage rate is set by the IRS in the U.S. and by national revenue agencies in other countries. It provides an approved benchmark for tax-deductible reimbursement: in other words, a maximum amount that employers can pay out tax-free.
Employers can set their own figure if they so choose. But if they exceed the standard mileage rate, the reimbursement will count as regular wages and lose its tax benefits (if they go below the rate, employees in many countries can deduct their difference when filing their tax return).
In the U.S., the IRS business mileage rate 2021 is as follows:
- 56 cents for every business mile driven (that’s down 1.5 cents from the business mileage mate for 2020).
- 16 cents for every mile driven for medical or moving purposes.
- 14 cents per mile driven in service of charitable organizations.
Here are some examples of the optional standard mileage rates in Europe:
- UK £0.45 per mile
- Germany €0.3 per km
- Belgium €0.35 per km
- Spain €0.19 per km
- Portugal €0.36 per km
- Austria €0.42 per km
Some countries have a more complicated version of the standard mileage rate, which depends on the type of car and the distance travelled.
You may have noticed that the mileage reimbursement rate is generally higher than the cost of fuel (in the U.S., motorists pay an average of around 15 cents a mile for their gas, less than a third of the IRS mileage rate). In fact, the rate is designed to include the total cost of maintaining a vehicle.
When an employee uses their car, they don’t simply pay for fuel. They’re also paying tax, insurance and other upkeep posts. Each trip they make accelerates the car’s wear and accelerates the depreciation of its value.
When calculating the standard mileage rate, the revenue agencies take all these factors into account. The IRS rate, for example, is based on a detailed annual study of all possible fixed and variable costs.
On top of this approved rate, some countries allow employees to claim extra money if they carry passengers in their private vehicle. The UK, for example, allows employees to claim an extra 5 pence per mile for every passenger. However the passenger must be a fellow employee or company officer, and their trip must also be work-related.
Are there any alternatives to the standard mileage rate?
In many countries, the approved corporate mileage rate is the most viable option. However, in the U.S. there is an alternative known as Fixed and Variable Rate Reimbursement, or Favr. Employees receive a core rate to compensate their fixed costs, supplemented by per-mile payments based on the variable costs in their postcode area.
Advocates of Favr suggest that it is more accurate than the standard mileage rate, because it is tailored to the actual costs that employees face in their locality (a particular advantage for teams spread over large areas). However Favr takes a bit more work than the standard mileage rate, and tends to penalise drivers over long distances.
Taxpayers can actually switch between the two, but only if they use the standard mileage rate in their car’s first year in service. Thereafter, they are free to calculate their actual expenses if they want – or compare the two and work out which is best for them!
Does mileage reimbursement need to go through payroll?
If the mileage reimbursement falls within the approved rate then no, it does not need to pass payroll. If the reimbursement exceeds the standard mileage rate, however, then it is regarded as remuneration and the element of ‘profit’ comes into play.
We should stress, however, that U.S. companies must set up an accountable plan before beginning their mileage reimbursement. Otherwise, any payments for travel and other expenses are treated as supplementle wages, which makes them taxable.
What is the mileage rate for independent contractors?
With more and more people going freelance during the pandemic, this question is more relevant than ever. And the good news is that, in the U.S. and other countries such as the U.K., self-employed people can claim the same rate as payrolled staff.
As a contractor (or indeed subcontractor) you can claim for a variety of journeys providing they qualify as ordinary and necessary moving expenses. Examples include:
- Driving from your workplace to a job site.
- Travel between two work sites.
- Meeting clients.
- Attending meetings away from your usual workplace.
- Returning to your workplace.
Self-employed taxpayers can claim their mileage expenses on their tax return by working out the amount they’ve spent on gas, maintenance and repairs over the whole year, or by calculating how much of their overall driving is for work.
Ok, that’s all! We hope we’ve answered all your questions about mileage reimbursement and its many mysteries. Happy driving… and happy earning!