Mileage reimbursement is the payment an employee receives from their company to cover the costs incurred when using a personal vehicle for work-related purposes. This process allows employees to recoup the expenses of driving their own car while performing job duties, ensuring they are not financially burdened by business travel.
Companies typically have two primary approaches to determine what is paid for mileage reimbursement:
1. Exact Reimbursement of Actual Expenses
Under this method, the company pays the employee the precise amount they spent on the trip. This requires the employee to meticulously track and submit all actual expenses related to the business driving.
- What it covers: This can include the cost of fuel, oil, tires, maintenance, repairs, insurance, and even a calculated portion of the vehicle's depreciation during the business use.
- Process: Employees typically need to provide receipts and detailed logs for all expenditures.
- Pros: Highly accurate reflection of actual costs.
- Cons: Can be administratively burdensome for both the employee (tracking) and the employer (verifying numerous small expenses).
2. Preset Rate Per Mile
The more common approach involves reimbursing employees at a specific, predetermined rate for each mile driven for business purposes. This simplifies the process significantly.
- IRS Standard Mileage Rate: Many companies opt to use the IRS (Internal Revenue Service) standard mileage rate, which is updated annually. This rate is designed to cover all the variable and fixed costs associated with operating a vehicle, including:
- Fuel
- Maintenance and repairs
- Tires
- Insurance
- Depreciation
- Other operating expenses
You can find the most current rates directly from the IRS website.
- Company-Specific Rate: A company may also establish its own unique rate per mile. While this rate can be higher or lower than the IRS standard, many companies align with or stay close to the IRS rate to simplify tax compliance.
How Mileage Reimbursement is Calculated (Preset Rate Example)
Calculating reimbursement using a preset rate is straightforward. You simply multiply the number of business miles driven by the established rate per mile.
Let's illustrate with an example using a hypothetical rate:
| Business Miles Driven | Preset Rate Per Mile | Total Reimbursement |
|---|---|---|
| 50 miles | $0.67 | $33.50 |
| 120 miles | $0.67 | $80.40 |
| 25 miles | $0.67 | $16.75 |
Practical Insights for Employees and Employers
Effective mileage reimbursement hinges on clear policies and accurate tracking.
- For Employees:
- Keep meticulous records: Whether using a manual logbook or a mileage tracking app, accurately record dates, destinations, purposes of trips, and odometer readings.
- Understand your company's policy: Know whether your company uses actual expenses, a preset rate, and what documentation is required.
- Differentiate between business and personal miles: Only business-related mileage is eligible for reimbursement; commuting is typically excluded.
- For Employers:
- Establish a clear, written policy: This should outline the reimbursement method, rate, submission procedures, and eligible expenses.
- Utilize expense management software: Dedicated software can streamline the tracking, submission, approval, and payment process for mileage reimbursements.
- Stay updated on IRS guidelines: If using the IRS standard rate, ensure your systems are updated annually to reflect changes.
When handled correctly, mileage reimbursement provides a fair way for companies to cover the operational costs employees incur while using their personal vehicles for the benefit of the business.
