Beginning on January 1, 2020, the standard mileage rates for reimbursement for employees who use their personal vehicles for work declined.
When employees use their vehicle for work-related travel, they may be entitled to gas mileage reimbursement. If the vehicle is owned by the company, and gas and maintenance on the vehicle are paid for by the company, no reimbursement is needed. For workers who use their own car, van, or truck to perform their duties, The IRS sets allowable reimbursement rates annually.
The Internal Revenue Service announced gas mileage reimbursement rates for 2020 in December.
For this year, the mileage rate in 2 categories have gone down from previous years:
- 57.5 cents per mile for business miles (58 cents in 2019)
- 17 cents per mile driven for medical or moving purposes (20 cents in 2019)
- 14 cents per mile driven in service of charitable organizations
Reimbursement rates cover all the costs related to driving for business. They are calculated to include gas, insurance, plus wear and tear on the vehicle. Employers who pay mileage reimbursement should not pay for gas and oil changes, as they’re covered under the overall cost.
Do employers have to reimburse for mileage?
Under the law, employers are not required to reimburse workers for business mileage, however attracting and retaining talent may hinge on doing so.
Gas mileage reimbursements are a legitimate tax deduction, so they have do benefit organizations.
Some companies, particularly those in the food delivery business, have been sued for not paying or underpaying mileage costs. Delivery workers and others who use their own vehicle may be covered under the Fair Labor Standards Act “kickback rule” if employees earn at or near the minimum wage.
For these staff members, non-reimbursed mileage costs or flat rate per delivery payments could put their actual wages below federal or state minimum requirements, creating a violation.
Adjusting for geography
The IRS rate is only a guideline. Employers may choose to reimburse at higher or lower rates, and many calculate a rate based on their location. The cost of driving and gas may be lower in one state over another. Some states even have their own guidelines for reimbursement rates.
For businesses that reimburse lower than the IRS rate, employees have the option to deduct the difference in costs on their own tax return. For businesses that reimburse higher than the IRS rate, overpayments may be considered taxable income to the employee.
3 ways to manage mileage reimbursements
There are 3 different ways to handle mileage reimbursements, paid by the company in full or in part, or paid by the employee:
- Employer reimburses the full mileage rate – no deduction for the employee
- Employer reimburses less than the mileage rate – employees can deduct the difference in cost
- Employer does not reimburse – employees can deduct the full mileage reimbursement rate
If employees are claiming a mileage rate deduction they will need to itemize their expenses on their annual tax form. In order to be eligible, the mileage costs must exceed 2% of the employee’s AGI (adjusted gross income). Unless employees drive a significant amount for business, the paperwork may be prohibitive.
Establishing a gas mileage reimbursement policy
To manage gas mileage reimbursements, business should have a clear policy in writing. The policy should cover what types of business travel are included, specifying that personal travel (to and from work) are excluded, what paperwork employees will need to submit to be reimbursed.
Employers may require staff members to submit their mileage by tracking their car’s odometer reading before and after the trip. Another way to calculate miles could be to use GPS or internet maps to verify the mileage used. Company policies may require employees to take the shortest possible (not the scenic) route and from their destination.
Here’s where it can get a bit tricky. Consider an employee will need to fly out of town on business. The airport is 10 miles from your company, but the employee’s home is 50 miles away. Should you reimburse for the differing 40 miles? A clear policy should outline whether you estimate mileage from the company location or from the employee’s home, and when or if, that could vary.
In keeping with IRS guidelines for legitimate business expenses, your policy should outline the types of travel that can be reimbursed. The IRS requires deductible business expenses must be both “ordinary and necessary.” Here are some examples:
- Temporary job sites
- Visits to customers
- Running errands or getting supplies
- Travel to and from business meals and entertainment
- Travel to and from airports for flights
- Convention/seminar travel
Your policy should include that employees submit their mileage in a timely manner for reimbursement. Company guidelines might include that reimbursement requests be received no more than 30 days after the trip, or if the employee travels routinely, that weekly or monthly requests must be made. The mileage should include the amount, time, place and business reason for the expense.
Understanding what rate the IRS allows under the law, and remember the guidelines change every January, should be the first step in creating a gas mileage reimbursement policy that’s fair to employees and helps business manage costs and deductions.