Traveling to meet business goals is a common scenario in most organizations. Employees may use their vehicles for business assignments. However, many companies provide cars to employees for transportation during business trips. Mileage reimbursement is the practice of reimbursing a specific amount to employees who use their vehicles for a company’s business purpose. It also enables employers to claim a tax refund.
Business mileage reimbursement rules are complex and may vary as per the state or the country. The company’s travel policy should include guidelines on mileage reimbursement to let employees understand the procedure for claiming mileage expenses.
Mileage reimbursement meaning
Mileage reimbursement is the payment made by an employer to an employee for using their own vehicles for business related activities. These expenses may include cost of gas, wear and tear, vehicle maintenance and more.
What does mileage reimbursement cover?
All trips covering various business activities are eligible for mileage reimbursements. The cost of reimbursing mileage covers the following:
- Fuel expenses
- Cost of tires
- Vehicle repairs
- Maintenance expenditure
- Vehicle depreciation
- Insurance
- Routine trips that qualify for mileage reimbursement are
- Off-site meetings with clients
- Airport transfer
- Driving to the train or bus station for a business trip
- Attending trade fairs
- To meet vendors or distributors
- To reach the training or conference venue
How does mileage reimbursement work?
When an employer is reimbursing mileage for covering business activities, the reimbursement falls under business expenses. These costs are deductible for tax if the employer is a taxpayer.
Mileage reimbursement for employees extends to vehicles, such as cars and bikes, when an employee undertakes the journey during work. Employees should record the details of such journeys by writing key details.
These details can pertain to the time, date, and distance. It is advisable to note down the readings for the computation of business miles. The details should provide information about the purpose and destination of the business trip for mileage reimbursement.
Employee mileage reimbursement methods
An organization should develop a mileage reimbursement policy for tracking mileage and explain the method to reimburse mileage to employees. Further, it should efficiently guide the employees on how to claim mileage. Organizations adopt different reimbursement methods, as shown below. These methods differ in how you calculate mileage costs.
1. Mileage allowance
Employees receive a certain amount as a monthly mileage allowance, covering expenses for driving and maintaining the vehicle. The mileage allowance should consider the probable miles an employee may cover in the subsequent month. Multiplying the number of projected miles with the standard fuel rate gives you the amount of mileage allowance. The company pays excess mileage expenses after the submission of the mileage claim. There will be a deduction of the amount if the actual expenditures are less than the mileage allowance.
2. Reimbursing expenses at actual
Paying the part of expenses for business use from the total amounts for driving the vehicle by an employee refers to reimbursing the actual expenses. The employee should maintain track of miles to cover business functions. The log should include relevant details of the business trips, including their purpose. The employee should submit these with fuel receipts with the expense report for reimbursement. Actual expense reimbursement considers fuel, parking, toll charges, insurance premiums, and depreciation to arrive at the total amount.
3. Standard mileage system
In the standard mileage system of business mileage reimbursement, the organization pays a standard per-mile rate multiplied by the number of miles in a month. It is a straightforward method to reimburse mileage expenses to the employees. The per-mile rates for cars and bikes are different because of the variance in fuel consumption.
4. Fixed and Variable Rate (FAVR)
The FAVR method combines fixed and variable expenses for mileage reimbursement and is a common practice in many organizations. The Fixed and Variable Rate method is a suitable alternative to the standard mileage system. The method determines the rate per mile with a combination of variable expenses like fuel and repairs and a fixed amount for expenses like depreciation and insurance premium.
5. Using expense management software
SaaS-based travel and expense management solutions can help employees track mileage through smartphones by integrating with a GPS tracking system. The advanced software tracks the mileage and submits the amount by calculating the amount for mileage reimbursement. The program allows customization approval workflows per employee levels for faster mileage reimbursement.
Suggested Read: Why Automation Is Needed For Travel Expense Reimbursement
Why is employee mileage reimbursement important?
Mileage reimbursement is beneficial to employees as it helps them cover the costs of using their vehicles for business use. They can conveniently reach the locations on time. Mileage reimbursement improves the travel experience and boosts employee retention. Employers can claim business mileage reimbursement costs for a tax deduction. Organizations can save the costs of owning cars for business trips by adopting a mileage reimbursement policy.
Mileage reimbursement rules
Though there are no specific rules for mileage reimbursement, the companies can set their own regulations for such expenses. Further, these reimbursement may be subject to taxation, companies should consult their tax experts before reimbursing the mileage for an employee.
Conclusion
Mileage reimbursement improves employee satisfaction and enables employers to claim tax benefits. Using online travel and an expense management platform can boost the effectiveness of mileage reimbursement.
The expense management software ensures automatic mileage tracking, saving employee time and accuracy. SaaS-based expense management solutions allow customization of expense policies for an accurate and fast mileage reimbursement process.
Mileage Reimbursement FAQs
What type of journey is not eligible for a tax deduction and mileage reimbursement?
Many traveling expenses like air, train, and taxi fares are eligible for a tax deduction if these relate to business trips by employees. However, the cost of traveling to work and back home does not qualify for the business mileage reimbursement for employees and tax deduction for the employer. A journey involving traveling for personal reasons does not qualify for reimbursement and tax benefits.
How to ensure cost control through mileage reimbursement?
Relying solely on employees for reporting mileage for business trips may cause errors. It can also impact cost control. Using an online expense management system improves accuracy with the help of GPS tracking and ensures effective cost control.
Why is the Fixed and Variable Rate (FAVR) method for mileage reimbursement preferable?
The FAVR method combines variable and fixed expenses. It reimburses a fixed amount by combining variable mileage rates to eliminate discrepancies. The method ensures greater employee satisfaction as compared with standard mileage reimbursement models.
Is fuel reimbursement and mileage reimbursement the same?
Fuel reimbursement covers the cost of fuel for a particular journey. Mileage reimbursement considers the fuel and other costs, like depreciation, maintenance, repair, and insurance.
Why do companies reimburse mileage?
Business mileage reimbursement compensates employees for fuel and other expenses if they use their vehicles for business purposes. It helps companies avoid the cost of owning and maintaining cars. The mileage reimbursement is helpful for a tax deduction.
How to ask for mileage reimbursement?
Employees can ask for reimbursement by, keeping accurate records, calculating the amount of reimbursement you are owed, submitting a reimbursement request, attaching any required documentation, and following up.
Does mileage reimbursement include gas charges?
Yes, it includes gas charges.
Is mileage reimbursement taxable?
Yes, mileage reimbursement can be taxable.
Who is eligible for mileage reimbursement?
Employees who use their personal vehicles for work related purposes are eligible for mileage reimbursement.
How does mileage reimbursement work?
Employees are required to record the expense and submit the report to the employer in order to claim mileage reimbursement.
How is the mileage rate determined for reimbursement?
It can be set by the employer who can refer to the rates set by the tax authority of the company.
Can I claim mileage reimbursement for personal travel?
No, it will only be reimbursed for business travels.
Are there any limitations or restrictions on mileage reimbursement?
Yes, there are often limitations and restrictions on mileage reimbursement such as eligibility criteria, distance limitation, and vehicle type.
