If your company pays you back when you use your own car for work, that’s mileage reimbursement. Essentially, it’s a payment from your employer to cover the costs of using your personal vehicle for business trips.
So, the big question is: Is mileage reimbursement taxable? The answer is usually no, as long as it follows the IRS rules.
The IRS has specific requirements you need to meet in order for your mileage reimbursement to be considered tax-free. The two biggest factors are the IRS standard mileage rate and something called an “accountable plan.” Let’s take a closer look at how these work.
IRS Accountable Plan: The Key to Tax-Free Reimbursement
The IRS has rules about what is and isn’t taxable. When it comes to mileage reimbursement, the key to keeping that reimbursement tax-free is something called an “accountable plan.”
What is an accountable plan?
An accountable plan is a set of rules and procedures that, when followed, allows reimbursements to be excluded from an employee’s taxable income. Without an accountable plan, reimbursements are generally taxable.
What are the requirements of an accountable plan?
To qualify as an accountable plan, a reimbursement arrangement needs to meet these requirements:
- Business Connection: The reimbursement must be for legitimate business expenses. That generally includes travel between offices, visits to clients, business meetings, and travel to a temporary work location. Daily commuting is not an eligible expense.
- Adequate Accounting: You have to keep good records of your expenses and submit them in a timely way. Usually, that means within 60 days of incurring the expense.
- Returning Excess Reimbursements: If you receive an advance or allowance that exceeds your actual expenses, you have to return the excess amount to your employer within a reasonable timeframe — typically, within 120 days.
What happens if an accountable plan isn’t followed?
If you don’t meet all of the requirements of an accountable plan, the reimbursement is treated as taxable income. Inadequate documentation, for example, can cause the entire reimbursement to be considered taxable, not just the portion that’s undocumented.
IRS Standard Mileage Rate: A Benchmark for Reimbursement
The IRS publishes a standard mileage rate that businesses can use to pay back employees for using their own vehicles for work. This rate is meant to cover vehicle expenses like gas, maintenance, and wear and tear.
Here’s a look at the standard mileage rate for a few recent years:
- 2023: 65.5 cents per mile
- 2024: 67 cents per mile
- 2025: 70 cents per mile
Tax implications of using the standard rate
If your employer reimburses you at or below the standard rate and has an accountable plan in place, the reimbursement generally isn’t taxable. However, if your employer reimburses you at a higher rate than the standard mileage rate, the difference is considered taxable income.
For example, if your employer reimburses you at $0.70 per mile in 2024, $0.03 of that reimbursement would be considered taxable income.
Fixed and Variable Rate (FAVR)
Another way companies can reimburse employees for vehicle expenses is through a fixed and variable rate (FAVR) plan. As long as the reimbursements align with FAVR, they’re generally not taxable.
When Mileage Reimbursement Becomes Taxable
While mileage reimbursement is usually tax-free, there are a few situations where it can become taxable income. Here’s what to avoid:
- Reimbursement Exceeds the IRS Standard Mileage Rate: The IRS sets a standard mileage rate each year. If your employer reimburses you at a rate higher than this, the amount above the IRS rate is considered taxable income.
- Non-Accountable Plan: An “accountable plan” is one where you submit expense reports with documentation, and you return any excess reimbursement. If your employer uses a “non-accountable plan” (meaning they don’t require documentation or a return of excess funds), all of the mileage reimbursement is considered taxable income.
- Personal Commuting Expenses: The IRS is very clear on this: reimbursement for your regular commute to and from your primary workplace is always taxable.
- Inadequate Documentation: Keep good records! If you can’t prove your business miles with a mileage log or other documentation, the IRS may treat the entire reimbursement as taxable income.
- Failure to Return Excess Reimbursement: If your employer gives you an advance for mileage, and you don’t use all of it, you need to return the extra money within a “reasonable” timeframe. If you don’t, the IRS may consider the entire original reimbursement taxable.
Reporting mileage reimbursement on W-2 and 1099 forms
How you report mileage reimbursement on your taxes depends on whether you’re an employee or an independent contractor.
W-2 employees
If you’re an employee, any taxable mileage reimbursement you receive will be included in Box 1 of your W-2 form. If your reimbursement meets the IRS’s “accountable plan” requirements, the amount up to the standard mileage rate or FAVR will be reported in Box 12 of your W-2, using Code L.
If your reimbursements meet the accountable plan requirements and are incorrectly included in Box 1, you can ask your employer to issue a corrected W-2 form.
1099 contractors
If you’re an independent contractor, you’ll report your reimbursements on Form 1099-NEC. You can deduct eligible expenses on Schedule C.
In Closing
Understanding the IRS guidelines for mileage reimbursement is essential for both employers and employees. Following the rules of an “accountable plan” is the only way to ensure reimbursements remain tax-free.
Fortunately, there are modern tools and systems available that can make mileage tracking and management much easier. Automated expense management platforms can streamline the process, reduce errors, and help you stay compliant with IRS regulations.
To sum it up, remember these key points: use an accountable plan, stick to the IRS mileage rates, keep meticulous records, and report reimbursements accurately. Good recordkeeping is crucial and must align with IRS guidelines to avoid potential tax issues down the road.