Mileage Reimbursement Options Made Simple

Article By: Bill Vogel
Posted: April 10, 2018
From: VirtualHRPros.com
  
In an earlier post I wrote an article explaining the requirements for paying employees mileage reimbursement. In this post, I will explain the options companies have for paying employees mileage for driving their personal vehicles during work as part of their duties. As a reminder, employees that drive their own vehicles for the benefit of the company, such as picking up doughnuts on the way to work or running to the office supply store, are eligible for mileage reimbursement. 
 
Having already explained why companies must reimburse mileage, this article explains how to pay mileage reimbursements. There are primarily three types of mileage reimbursement methods:
 

• Fixed and Variable Rate
• Flat Car Allowance
• Standard Mileage Rate

 
The Fixed and Variable Rate(FAVR) method provides employees with a set reimbursement amount for vehicle insurance and registration. In addition, the FAVR program reimburses variable costs such as fuel and maintenance. Under the FAVR program the IRS allows vehicle reimbursements under $27,300 as tax free payments, and the limit for trucks is $31,000.  This can be a difficult reimbursement program to administer each month because the model and age of the vehicle can be part of the reimbursement calculation. However, there are several third party administrators that can provide this as an outsourced service. 
 
The Flat Car Allowanceprovides employees with a fixed dollar amount each month to cover fuel, maintenance, repairs and registration. However, an allowance is a taxable fringe benefit to the employee, which may not be considered a true reimbursement in some states. The amounts should be audited each year against changes in fuel and maintenance cost. This is to ensure the allowance represents actual costs for vehicle use during employment over time.
 
The Standard Mileage Rateis a flat amount paid for each mile driven by an employee during the course of work.  The amount paid to employees per mile should be no less than the IRS standard mileage rate, which is 54.5 cents per mile in 2018. To receive a reimbursement, employees submit a mileage reimbursement form created by the company . The form includes sections for the employee to complete such as the starting location, ending location, and the total miles driven, times the rate per mile. One common mistake made by employees, and missed by employers, is the failure to deduct an employee’s normal commute. For example, an employee drives to and from work for a total of 25 miles roundtrip, this amount is deducted from the reimbursement; following is an example.
 
Employee drives from home to meet with a potential customer for lunch which is 35 miles away, after lunch the employee drives 15 miles to the office. The employee’s normal commute to and from work is 25 miles. They key factor in this calculation is that the employee’s commute started from home and not the office, so the standard mileage reimbursement calculation is as follows:

35 miles + 15 miles = 50 miles
50 miles – 25 miles = 25 miles
25 miles x 54.5 cents = $13.63 for a total reimbursement.  

I should note however, that the IRS standard mileage rate is intended as a taxpayer write off for mileage and is therefore not recommended as part of company’s reimbursement program policy.  Before deciding on a reimbursement policy, companies need to consider the size of the mobile workforce and the cost of administering a mileage reimbursement program. Another option is providing company vehicles rather than employees using their personal vehicles, but this option often involves higher costs compared to reimbursement. 
 
As always, get help from a qualified HR Professional if you think your business is at risk, or needs help developing policies, procedures, and training courses to assist with workplace compliance requirements. When deciding on a reimbursement program, the HR should first consult with the finance or accounting department.