Mileage Reimbursement Taxable or Not?

If you’re reimbursing employees for miles driven on company business, you might wonder, “Is mileage reimbursement taxable?” The answer depends on IRS guidelines, company practices, and even some state-specific rules. Here, we’ll break down when mileage reimbursement is taxable and provide tips on keeping it tax-free.

What Makes Mileage Reimbursement Tax-Free?

The IRS allows tax-free mileage reimbursements under an “accountable plan.” To qualify as non-taxable, a mileage reimbursement must:

1. Cover only business-related travel expenses.
2. Be recorded accurately by the employee, including dates, miles driven, and purpose of each trip.
3. Not exceed the IRS standard rate (for 2024, this is $0.67 per mile).

Why the IRS Standard Rate Matters

For mileage to remain tax-free, reimbursement should not exceed the IRS rate. If it does, the excess will be considered taxable income for the employee. Most companies use the IRS rate for simplicity, but it’s not required by law. Some businesses even set their rate lower than the IRS rate, and that’s completely legal.

Is Mileage Reimbursement Required?

No Federal Requirement

There’s no federal law mandating that companies reimburse mileage. However, offering reimbursement is common since it benefits both the company and its employees. For the company, mileage reimbursements are a deductible business expense, and for employees, it helps cover the costs of business travel without affecting their taxable income.

State Requirements

In the U.S., only a few states currently require employers to reimburse mileage:

• California
• Illinois
• Massachusetts

In these states, companies usually use the IRS standard rate as a benchmark, but there may be some variations allowed depending on the state’s guidelines.

What Is the FLSA “Kickback Rule”?

The Federal Labor Standards Act (FLSA) has a rule called the “kickback rule.” It affects companies where employees make at or near minimum wage. This rule ensures that under-reimbursing mileage costs won’t push an employee’s effective wage below minimum wage. If it does, this is seen as a “kickback” to the employer, and the employer may face wage-and-hour issues.

For instance, delivery drivers often have claims related to the FLSA rule, especially if they’re only reimbursed a small amount per delivery.

When Is Mileage Reimbursement Taxable?

Mileage reimbursements become taxable in a few specific situations:

• Reimbursement Above IRS Rate: Any reimbursement over $0.67/mile (in 2024) is taxable.
• Non-Accountable Plan: If the reimbursement doesn’t meet IRS guidelines, it’s treated as income.
• Unreturned Excess Reimbursement: If an employee gets more than needed for mileage and doesn’t return the excess, it’s taxable.

In these cases, the excess amount will be included as taxable income on the employee’s paycheck.

Creating a Clear Mileage Reimbursement Policy

To keep things smooth, companies should have a clear mileage reimbursement policy. Here’s what to include:

1. Rate Information: State your reimbursement rate (whether it matches the IRS rate or not).
2. Documentation Requirements: Explain what records employees need to provide.
3. Eligible Trips: Specify the types of travel covered, and clarify what’s excluded (like commutes).
4. Return of Excess Reimbursements: Remind employees that excess funds should be returned to keep it tax-free.

With a clear policy, both employers and employees know what to expect, and tax compliance is easier.