How to Reimburse Employees for Mileage Expenses (Car Allowance vs Mileage Reimbursement)
Find out which of the two employee mileage expense reimbursement methods, the car allowance vs mileage reimbursement methods, is best for your company.
Two Methods of Employee Business Mileage Reimbursement
There are two payment options for reimbursing employees for business mileage expenses. The one you choose depends on your business needs and income tax regulations. Below we look at car allowance vs mileage reimbursement.
Mileage reimbursement is a method of mileage expense reimbursement where a company pays back employees after the employee has filed an expense report. Therefore, mileage reimbursement varies based on how much the employee drove. Typically, under the mileage reimbursement method mileage expenses are paid back at a cents-per-mile rate. This per-mile-amount takes into consideration the cost of fuel, wear and tear on the car (if the employee is driving their own car), and other costs associated with an employees mileage expenses. It’s not uncommon for companies to use the same per mile amount as published for by the IRS as the per mile mileage expense tax deduction amount. Each year the IRS updates these amount. Please scroll to the bottom of this article for a link to the article with the most up to date IRS mileage reimbursement rates, including ones in the past.
Using the standard mileage rate makes things a little simpler as for both the business and the employees. This is because any amount reimbursed in excess of the IRS standard mileage reimbursement rate for that given year must be reported as taxable income.
A car allowance is when an employer gives an employee a set amount for the business use of their personal vehicle. A car allowance is a preset amount given over a period of time. It covers the costs of an employee using their own car for work. The costs include fuel, tires, wear and tear, etc. Another way of describing a car allowance is an employee vehicle allowance.
How much car allowance should an employee be given?
Employers should give a car allowance to employees of an amount based on the estimated driving amount. No more than the IRS standard mileage rate should be used to calculate the estimated mileage allowance amount. For example, if it’s estimated that an employee will drive 1000 miles next month their car allowance amount should be no more than $575. The $575 is calculated by using the 2020 IRS standard mileage rate reimbursement amount of 57.5 cents per mile.
What are the Differences Between the Mileage Reimbursement and Car Allowance Methods?
The major difference between the mileage reimbursement method and the car allowance method is the mileage reimbursement method is based only on how much the employee drove (measured in miles or km). The reimbursement amount under the mileage reimbursement method isn’t taxable income. Under the car allowance method employees receive a fixed amount each month to cover the personal use of their car for business purposes. This amount is taxable income.
Summary of Differences Between the Two
- Under the mileage reimbursement method the employee of reimbursed only for the amount driven
- Under the car allowance method the employee is given a monthly fixed amount to cover business use expenses of their personal car
- Reimbursements made under the mileage reimbursement method aren’t taxable income
- Allowances given under the car allowance method are taxable income
How Much Should Employees be Reimbursed for Business Mileage?
In both cases (the car allowance method and the reimbursement method) the recommended per mile reimbursement rate is the IRS standard mileage rate for the year the expense was incurred.
Also, any excess amount reimbursed to the employee under the reimbursement method is subject to income tax.
Is Employee Mileage Expense Reimbursement Required for Employees?
There is no federal law that requires an employer to reimburse employees for mileage expenses. Also, the IRS doesn’t have any specific federal mileage reimbursement rules. However, some states, like California, require employers to reimburse employees for mileage.
Regardless, mileage reimbursement programs are often used as a selling perk to prospective employees. For example, if offered two jobs at two different companies with the same pay, one offers mileage reimbursement and the other doesn’t, the employee is likely to choose the with mileage reimbursement. Especially if the job requires the employee to drive a lot for work. Consider a mileage reimbursement program more of a norm for companies to offer their employees.
How Can Employees Track Mileage Expenses?
Use a mobile expense tracking app like Falcon Expenses to conveniently track mileage expenses. Falcon Expenses allows you to log mileage expenses while on the go. Therefore, never forget an expense again, and maximize your tax deduction. Falcon Expenses offers three different ways to track mileage expenses.
- Odometer log. Enter start and end odometer readings of a trip. Falcon Expenses calculates the miles driven and the expense reimbursement amount based on the custom reimbursement rate set in the app. Check out this article for more information on this feature and its benefits, Falcon Expenses Odometer Log Feature.
- Start and end addresses. Enter start and end address of the tax deductible commute or transportation. Falcon Expenses calculates the miles of the driving distance and the expense reimbursement amount. Check out this article for more information on this feature and its benefits, Falcon Expenses Addresses Feature.
- GPS mileage expense tracker. Use an integrated GPS tracker to track tax deductible business transportation miles as the miles are driven. Falcon Expenses automatically calculates the deductible mileage expense amount when the trip is complete. Check out this article for more information on this feature and its benefits, Falcon Expenses GPS Tracker.
About Falcon Expenses
Falcon Expenses is an iOS solution for expense tracking and management. Scan receipts, we type merchant, date and amount, auto-track mileage expenses via GPS and log billable hours with an integrated timer. Quickly organize expenses by time period, project or client and easily prepare reports for email to anyone in PDF or spreadsheet formats, all from your phone. Use for reimbursements, taxes, record keeping or invoicing. Falcon Expenses is great for professionals, freelancers, realtors, business travelers, truckers and more. Find out more, here.
Please check out the following articles for more information about Falcon Expenses features and services: