Employee reimbursement for using your own automobile will vary somewhat by employer and sector, but most organizations compensate employees at approximately the Standard Mileage Rate set by the Internal Revenue Service (IRS) or the Privately Owned Vehicle Reimbursement Rate. The rate is set each year by the General Services Administration (GSA) based on research conducted by an independent consulting firm regarding current costs for utilizing a vehicle.
For 2021, the Standard Mileage Rate is set at 56 cents per mile traveled (down from 57.5 cents per mile for 2020).
This fixed, standard rate incorporates the cost of insurance, registration, gas, oil, and maintenance. For someone who drives a lot for work, this can result in a significant deduction.
Company Mileage Reimbursement Rates
Most employers will reimburse at the IRS or GSA rate since they can deduct up to that amount as an expense when they file their corporate income tax return, though there are other complex tax formulas that employers can use. When qualified workers are difficult to find during economic expansions, employers are more likely to provide competitive rates of reimbursement.
The IRS requires reimbursement payments to be made separately from salary, with no taxes withheld. Some employers will, therefore, process expense payments through the accounts payable system to keep them separate from payroll and to maintain compliance with IRS laws.
Government Employee Reimbursement
Government employees will always be reimbursed at exactly the GSA rate if the use of a privately-owned car is authorized or when no government vehicle is available.
Automobile Expense Reimbursement Requirements
You'll need to provide a mileage log, gas receipts, and documentation of any other allowable expense receipt related to your car if you require mileage reimbursement. Without detailed records, your expense report may get rejected. Or worse, your employer could potentially take disciplinary action if they think your claim might be fraudulent.
Many employers require recordkeeping, just like the IRS. Don't attempt to estimate your mileage as that might violate your employer’s policies.
Keeping a pen and paper in your car is one method, albeit a tedious one; a better choice is a mileage tracking app that automatically tracks your trips in a contemporaneous log that you can print or download. It's an efficient way to keep track of mileage, start and end-points, and the business purpose for the drive to include with your expense report.
Other Ways Employers Compensate Employees for Automobile Expenses
According to the Society for Human Resource Management, there are common alternatives to mileage reimbursement as ways for employers to compensate employees for business-driving expenses:
Flat car allowance. Employers provide employees a flat car allowance, such as $400 per month, to cover the cost of fuel, wear and tear, tires, and more.
FAVR programs. Employers reimburse employees under a fixed and variable rate (FAVR) reimbursement program, in which employees are reimbursed for fixed costs (such as insurance, taxes, and registration fees) and variable vehicle expenses (such as fuel and maintenance). The reimbursements are tax-free to employees if certain expense-accounting requirements are met.
Tax Consequences for Mileage Reimbursements
Mileage reimbursements are considered tax-free disbursements by employers as long as they are documented and don’t exceed your actual expenses. However, your employer cannot directly pay for operating costs like repairs or maintenance for your car without tax consequences. Other expenses, such as tolls, that are directly related to business transportation can be reimbursed without taxation, provided you have receipts.
Some employers provide a monthly allowance for automobile expenses. If employees are required to furnish records of expenses, they will be taxed only for any amount received in excess of recorded expenses. If employers don’t require documentation, then the allowance may be subject to taxation.
Unreimbursed Automobile Expenses
Starting in the tax year of 2018, with the implementation of the Tax Cuts and Jobs Act, workers are no longer able to deduct unreimbursed automobile expenses on their taxes. In 2017 and earlier years, these expenses were deductible to the extent that they were in excess of 2% of adjusted gross income. So, workers who will drive extensively as part of carrying out their job responsibilities should carefully evaluate company reimbursement policies as they review job offers.
If an employer does not typically reimburse car expenses, then you might offer to reduce salary in exchange for reimbursement since the reimbursement will be sheltered from taxation if expenses are documented appropriately. Alternatively, you might negotiate a higher salary to account for the added tax burden under the new tax law.
According to the IRS, despite the suspension of miscellaneous itemized deductions, deductions for expenses that are deductible in determining adjusted gross income are not suspended. For example, members of a reserve component of the Armed Forces of the United States (Armed Forces), state or local government officials paid on a fee basis, and certain performing artists are entitled to deduct unreimbursed employee travel expenses as an adjustment to total income and, therefore, may continue to use the business standard mileage rate.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.