No matter who or where you are, you’ve felt the impact of high gas prices. The IRS has responded by increasing the standard mileage rate for the business use of employees’ vehicles for the remaining 6 months of 2022.
From July 1 to December 31, 2022, the IRS standard rate is 62.5 cents per mile for employees’ business use of their vehicles.
The rate for the first half of 2022 remains at 58.5 cents per mile.
How should you handle this IRS change? Factors to consider include:
- understanding the federal versus your state’s compliance requirements,
- considering if your company would benefit from implementing the mileage reimbursement change (or if creating a mileage reimbursement policy would be advantageous), and
- analyzing the different methods of calculating mileage reimbursement. (You’re not required to use the IRS rates.)
How do you stay compliant?
It’s not a federal requirement to reimburse your employees for business-use mileage clocked in their personal vehicle. But, these states do require it: CA, IL, and MA.
However, companies are required to reimburse employees for work-related expenses (which might include the mileage) if their net pay would drop below the federal minimum wage. There are significant penalties if this happens, not to mention it’s illegal to pay less than minimum wage.
On the positive side, mileage reimbursement is tax deductible for employers (and independent contractors). Additionally, it is not considered income to the employee and therefore is nontaxable. So, your business does not incur payroll taxes on the mileage reimbursement funds.
But be aware that if you reimburse employees for mileage beyond the true expenses of work-related driving, this could be considered compensation and thus be subject to payroll taxes. Your business is only required to use the standard of “reasonably necessary” amounts to reimburse employees for their work-related expenses.
Should your company reimburse?
Even if reimbursing employees for work-related mileage is not required by law, it can still be beneficial to include a mileage reimbursement program in your policies. It could help you find and retain high-quality candidates. It can improve employee satisfaction to know that the company is sensitive to factors that impact them directly. Running a mileage reimbursement program could be more cost-effective than maintaining company cars. And those reimbursements to employees for work-related mileage are tax deductible for your company.
What methods are available to calculate mileage reimbursement?
It is convenient to use the IRS standard mileage rate for employee reimbursement but using the IRS rate could be more costly for your business, depending on your location and the number of miles typically driven. Gas and vehicle costs vary widely across the country, so you don’t want to offer more or less than what is reasonable for your location. Benefits advisors have been suggesting that the IRS rate works best for employees who travel fewer than 5,000 business miles per year.
Many businesses prefer to use a Fixed and Variable Rate (FAVR) allowance plan, which takes into consideration both fixed vehicle costs (such as insurance, taxes and registration fees) and variable vehicle expenses (such as fuel, tires, and routine maintenance and repairs). These costs are estimated based on geographical information.
Another method businesses can use to reimburse employees for their work-related driving is to offer a flat car allowance. This is a set amount provided to employees over a given period of time for them to use toward the cost of using their personal vehicle for business purposes.
Whatever bookkeeping method you implement for your mileage reimbursement program, CRI Payroll can easily incorporate your policy into your payroll processing. CRI Payroll Service’s personalized service plus world-class payroll and HR related products, will save you time, increase your business’s productivity, and eliminate hassle.
Before deciding if and what type of mileage reimbursement program to implement at your business, talk with your accountant and/or legal advisor for advice and details. And if you have questions on incorporating mileage or other work-related expenses into your payroll process, please contact us.
Link to the IRS news release: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022