“If you pay more than the cost of reimbursement, it is considered compensation and is taxable.” “On the tax side, if you’re reimbursing, it is considered tax-free both to employer and employee,” Lackey said. However, if an employer reimburses an employee beyond the true expense of driving for work-related purposes, a portion of the reimbursement could be considered compensation and would be subject to taxation. Additionally, it is not considered income to an employee and therefore is nontaxable. Mileage reimbursement is tax-deductible for employers and independent contractors. “You want to make sure you’re reimbursing them enough to cover their expenses.”Ĭertain states – including California, Illinois and Massachusetts – do mandate that employers reimburse employees for mileage and vehicle expenses related to work. “On the employment law side, you are required to reimburse employees for expenses,” said Danielle Lackey, chief legal officer at Motus. When failure to reimburse employees – including for mileage and vehicle costs – causes an employee’s net pay to fall below the federal minimum, employers could be open to lawsuits and the legal penalties associated with failure to pay the minimum wage. However, all employers are federally required to reimburse employees for any work-related expense to a point. On the federal level, there is no requirement for employers to reimburse employees for mileage when workers are using personal vehicles for company purposes. Employment law related to mileage reimbursement There are two legal considerations to keep in mind when developing a mileage reimbursement policy: employment law and tax law. Here are other business expenses you need to track. Mileage is one of many costs you should monitor to maximize your tax returns and optimize cash flow. Managing a mileage reimbursement policy means understanding the minimum obligations under both federal and state laws, as well as how to establish an efficient rate that fairly reimburses employees without increasing their compensation and incurring payroll and income taxes for both the employer and employee. However, this approach can result in overpaying employees for mileage, which could incur additional taxes. Some companies prefer to set a monthly flat rate for reimbursement when employees are regularly using their own vehicles for company purposes. Mileage reimbursement is typically set at a per-mile rate – usually below $1 per mile. These expenses can include fuel costs, maintenance and vehicle depreciation. Mileage reimbursement is when employers offer employees reimbursement for expenses associated with driving on behalf of the business. This guide explains the basics of mileage reimbursement and how to devise a policy that reimburses your employees fairly and efficiently. There are both legal requirements and business considerations to keep in mind when determining whether you need a mileage reimbursement policy and what it should look like. If you don’t have a fleet of company vehicles and employees are driving their own vehicles on your business’s behalf – making deliveries, inspecting workplaces and gathering supplies – what are your obligations regarding fuel costs, maintenance and vehicle depreciation? This article is for small business owners who want to establish a reimbursement policy for mileage and vehicle costs employees incur when driving for work-related purposes.The current IRS mileage reimbursement rate is $0.625, but you should use a fixed and variable rate (FAVR) program to determine a fair and efficient reimbursement rate by geography.Mileage reimbursement is federally required when failure to reimburse would decrease an employee’s net wages below minimum wage otherwise, businesses could be open to lawsuits and financial penalties.Employers are not federally required to reimburse employees for mileage and vehicle costs, but state laws may apply in some jurisdictions.
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