Mileage Reimbursement: Understanding Employee Rights And Company Obligations

Mileage reimbursement is a complex topic, with laws and regulations varying from country to country and state to state. In the US, there is no federal law mandating companies to reimburse employees for mileage or travel expenses when they use their personal vehicles for business purposes. However, there are certain exceptions and state-specific regulations that businesses should be aware of. Firstly, employers must ensure that reimbursements do not cause an employee's net pay to fall below the federal minimum wage. This is regulated by the Federal Labor Standards Act (FLSA) and is known as the kickback rule. Additionally, as of 2024, three states – California, Illinois, and Massachusetts – require companies to reimburse employees for business-related mileage and expenses. While not a legal requirement in most other states, mileage reimbursement is still a common practice, as it helps attract and retain employees and offers tax benefits for both parties.

No federal law requires mileage reimbursement, but some states do

No federal law requires mileage reimbursement, but some states have passed their own laws. As of 2024, California, Illinois, and Massachusetts mandate that employers reimburse employees for business-related mileage and vehicle expenses. Other states may also have similar laws, and employers should routinely check their state laws for compliance.

While federal law does not require employers to reimburse employees for mileage accrued while driving for work-related purposes, employers must reimburse employees for mileage if failure to do so would reduce their net wages below the minimum wage. This rule applies to businesses of any size and is governed by the Federal Labor Standards Act (FLSA). The FLSA has a narrow exception concerning mileage reimbursements, called the kickback rule, which governs money kicked back to the employer in the form of under-reimbursed mileage expenses. If the value of those reimbursements pushes the employee's salary under the minimum wage, a wage and hour issue is created.

There have been several cases in which failure to properly reimburse for mileage has resulted in class-action lawsuits. For example, two large Domino's Pizza franchises found themselves in court defending class-action suits from delivery drivers who were being paid a flat $1 per-delivery fee. They claimed they were being underpaid by $1.30 per delivery and $3.25 per hour. In another case, Papa John's Pizza delivery drivers claimed that they should have been reimbursed for vehicle expenses at the IRS standard mileage rate.

Companies are not required to reimburse employees for commuting to and from work. However, reimbursing employees for mileage can be a smart way to attract and retain employees. Reimbursements made at the standard Internal Revenue Service (IRS) rate are not considered income, so they are not subject to tax. Companies also get a tax break as the reimbursement payments are a deductible business expense.

Companies that don't reimburse risk losing staff and damaging their brand

Companies that don't reimburse mileage risk losing staff and damaging their brand

While there is no federal law requiring companies to reimburse employees for mileage, some state laws do. As of 2024, California, Illinois, and Massachusetts mandate businesses to reimburse their employees for business-related mileage and expenses.

However, even in states without such laws, companies that choose not to reimburse employees for mileage or other business expenses risk losing staff and damaging their brand. This is because employees who feel they are not being fairly compensated for their work or expenses may become disengaged and look for opportunities elsewhere.

High employee turnover can have several negative consequences for a company. Firstly, it can lower morale and make employees feel disconnected. It can also impact productivity, as remaining employees may become overwhelmed with additional work. Moreover, the financial impact of recruiting and training new employees to replace those who have left can be significant, with turnover costing thousands of dollars per employee.

Additionally, companies that fail to properly reimburse employees for mileage may face legal repercussions. For example, there have been several cases of class-action lawsuits against companies that did not adequately reimburse their employees for mileage.

Therefore, companies that do not reimburse mileage not only risk losing staff but also damaging their brand and facing legal consequences. Implementing a comprehensive mileage reimbursement policy that adheres to state laws and industry standards is crucial for businesses to avoid these risks.

Mileage reimbursement is tax-deductible for employers and isn't taxed for employees

Mileage reimbursement is a benefit for both employers and employees. While it is not a federal requirement for employers to offer mileage reimbursement, it is a great way to attract and retain employees. Mileage reimbursement is tax-deductible for employers and is not taxed for employees.

The Internal Revenue Service (IRS) sets the standard mileage reimbursement rate annually. Employers can choose to reimburse their employees at this standard rate or a lower rate. The standard mileage rate for 2022 is 58.5 cents per mile for business, 22 cents per mile for medical and moving purposes, and 14 cents per mile for charitable purposes. The standard mileage rate for 2024 is 67 cents per mile for business, 22 cents per mile for medical and moving purposes, and 14 cents per mile for charitable purposes.

The IRS requires employees to maintain a mileage log with the following details:

• The time and date of each journey
• The total distance covered
• The destination of each drive
• A brief description of the purpose

It is important to note that mileage reimbursement is not meant to cover commuting to and from work. It is designed to cover the journeys that employees make during work, specifically those with a business purpose.

Employers can also choose to offer reimbursement for all expenses a worker incurs to maintain their vehicle if it is often driven for work. This can include fuel costs, routine maintenance, car insurance premiums, registration, and more.

To be tax-free, the employee's mileage reimbursement must meet certain conditions. The reimbursement must be for services completed on behalf of the business, with appropriate documentation, and any excess reimbursement must be returned within a reasonable amount of time.

Overall, mileage reimbursement is a great way for employers to show their support for their employees who frequently travel for business. It provides financial assistance and helps boost employee satisfaction and retention.

Mileage reimbursement rates vary by country and are adjusted annually

The IRS's standard mileage rates serve as a benchmark for many businesses when reimbursing employees for using their personal vehicles for business purposes. While there is no federal law mandating mileage reimbursement, some states, like California, Illinois, and Massachusetts, require companies to compensate employees for business-related mileage and expenses. The IRS rate for 2024 is 67 cents per mile, a slight increase from the 2023 rate of 65.5 cents per mile.

The IRS accountable plan outlines three criteria for reimbursement arrangements. Firstly, reimbursements must cover deductible business expenses, including travel for business purposes. Secondly, employee records must substantiate claims by specifying the time, place, and purpose of the travel. Lastly, any excess reimbursement should be returned to the employer. Businesses benefit from adhering to the IRS standard rate because reimbursement payments are considered deductible business expenses and are not subject to tax.

Although the IRS rate is optional, choosing an alternative approach, such as tracking actual travel-related expenses, can complicate tax accounting and expense record-keeping for both employers and employees. Companies should be aware of the Federal Labor Standards Act (FLSA) kickback rule, which governs mileage reimbursements for employees earning at or near the minimum wage. Proper reimbursement policies should include details such as valid driver's licenses, adequate insurance, excluded activities, and policy violations.

Mileage reimbursement doesn't cover commuting to and from work

Mileage reimbursement is a way to compensate employees for using their personal vehicles for work-related tasks. While it is not required by federal law, it is mandated by some state laws, including those of California, Illinois, and Massachusetts.

The Internal Revenue Service (IRS) defines commuting as "the cost of transportation between your home and your main or regular place of work". According to the IRS, commuting expenses for going to work and back are not deductible. Therefore, commute rules generally do not allow commuting mileage to be claimed as business mileage. However, there are exceptions to this rule.

If an employee's home is their primary workplace, they can claim travel to other work locations as business mileage. Travel between work locations can also be claimed as business mileage. For example, if an employee travels to more than one job or worksite during the day, they can include the travel from one job or location to another in their business mileage. However, they cannot include the drive to or from home.

If an employee travels temporarily to a worksite outside of the metropolitan area that they usually live and work in, they can claim the mileage as business mileage. If an employee has a qualifying home office that meets the IRS criteria as their main place of business, they may be able to deduct travel expenses between their home office and other work locations from their taxes. However, it is important to note that these criteria are stringent.

Commuting mileage reimbursement is not a common business practice and is not required by law. However, reimbursing business mileage is considered a good business practice, although it is not mandated by federal law.

Frequently asked questions