Reimbursing Employees for Business Miles and Vehicle Expenses
For plenty of employees around the U.S., deducting non-reimbursed business miles and other business-related vehicle expenses is a normal part of filing taxes. Starting this year, things will be different.
Tax Changes Affect Mileage Deductions
The Tax Cuts and Jobs Act, signed into law at the end of 2017, put a freeze on the miscellaneous itemized deductions listed in Section 67 of the tax code. The suspension doesn’t end until January 1, 2026.
The IRS’s Notice 2018-42 spells out how updates to the tax code affects mileage reimbursements.
- For example, the business standard mileage rate increased to 54.5 cents/mile for the 2018 tax year. For 2019, the rate is up to 58 cents.
- However, employees will not be able to use these rates to claim itemized deductions for any unreimbursed vehicle expenses.
For employees who are used to deducting un-reimbursed mileage and other vehicle expenses from their net income, the change might come as a shock.
- This could include members of different departments who put considerable business miles on their vehicles during the year.
- They might turn to your leadership to see how your company can help fill the gap, and recoup some of what they might consider to be tax losses.
Have you reviewed your mileage reimbursement policy lately, with an eye toward these tax changes?
Below, we’ve outlined two methods that some employers use to reimburse employee miles and other business-related vehicular expenses.
A mobile-friendly expense management software like ExpenseWire can help keep complications out of the equation for employees, managers, and administrators. Request a demo, and learn more today.
How Employees Can Recoup Vehicle Costs
Most employers reimburse workers for the miles they drive when performing work-related activities. But what about reimbursing employees for things that go beyond direct business miles?
- If a worker logs a few hundred, or a few thousand business miles per month on their own car, do you cover the costs of oil changes and minor repairs?
- Do you specify the types of events for which they can deduct miles? For example, offsite client meetings are okay to deduct, but after-hour client dinners are not? What about client entertainment?
Now that workers can no longer claim unreimbursed mileage or business-related expenses on their taxes, they’re turning to employers to help fill the gap. Here are two of the more common methods that companies are exploring in order to support employees:
1. Offering a standard (flat) vehicle and mileage allowance
Offering a standard, or flat allowance, whether paid monthly, quarterly, or annually, is one of the easiest ways to reimburse employees across the board for mileage, fuel, and wear and tear they put on their vehicles in the name of business.
- Writing a separate check can save time from having to parse through and calculate actual expenses.
- Doing so can also be very simple to manage.
- And, you can use the flat vehicle allowance as an employee perk to help your recruiting and retention efforts.
However, when you look a little deeper, a flat allowance might not be the best business decision:
- Some employees might think that a flat allowance favors workers who don’t drive as much, especially if they put more miles on their vehicle than the average employee.
- While it might be easy to manage, it can be difficult to calculate true expenses over the course of a year. This includes the fluctuating price of gasoline, or different rates of scheduled repairs and tune-ups. One month, your company might lose money. The next, your employees might feel short changed.
Then there’s the fact that flat car allowances can actually cost you and your employees added taxes:
- When you administer a flat car allowance, you pay FICA taxes on that amount. It’s not simply an “under the table” payment to your employees. If the allowance is $300 a month, you’re actually paying closer to $325 per employee.
- Likewise, employees must also pay income taxes on the amount they receive.
2. A fixed and variable rate (FAVR) program
With a FAVR program, you reimburse employees for a variety of fixed and variable costs:
- Fixed costs include things like insurance, taxes and registration fees.
- Variable vehicle cover ongoing expenses such as gasoline and maintenance.
The main difference between a FAVR program, and a flat vehicle allowance, is that for employees, FAVR reimbursements are tax-free, as long as they meet certain requirements, including:
- For 2018, vehicle costs cannot exceed $27,300 for automobiles, or $31,000 for trucks/vans. For 2019 taxes, the cost calculation has changed to $50,400 for automobiles, trucks and vans.
- Employers must make FAVR payments at least quarterly.
Generally speaking, the IRS considers FAVR programs to be the most accurate way to reimburse employees for the vehicle costs.
- FAVR programs include personalized mileage reimbursement rates, which are based on each employee’s actual vehicle usage, and are calculated by specific locations.
- In addition, FAVR programs require that employees and employers track, process, and reimburse accurately. This creates a data trail that the IRS can rely on in the event of an audit.
A FAVR program can also be a winning solution in the eyes of employees:
- In locations where vehicle operating costs are on the high side, the FAVR allowance can actually be higher than the IRS’s mileage reimbursement rate.
No matter how you reimburse for vehicle expenses, look for ways to automate your process.
Using automated expense management software such as ExpenseWire can help you manage your vehicle reimbursement program, and simplify the process for employees, managers, and administrators:
- Account for driving costs in real time.
- Capture miles as they happen, rather than after the fact.
- Give employees tools to automatically upload receipts for fuel or automotive services.
- Set reminders that alert employees when they’re approaching the end of their monthly allowance, or in cases where they claim a service that isn’t covered.
- Create a data trail that helps you measure ROI on projects and events…and that the IRS craves.
The tax code might be complicated. Submitting mileage and vehicle expense reports shouldn’t be. Bring a new level of ease and simplicity into your daily operations with ExpenseWire.
Are you looking for an expense management solution that keeps things simple, provides useful, actionable data, and helps everyone do away with guesswork? Contact ExpenseWire to learn more.