Mileage Reimbursement Policy SampleBy Kathleen Burns
Everything you need to know about creating a mileage reimbursement policy, with examples to reference for inspiration
They say that in order to make money you have to spend money. For many businesses, travel makes up a significant portion of their spending. Sometimes this travel takes place by plane, and sometimes it takes place by car.
It’s relatively simple to reimburse business travelers for out-of-pocket spending on flights. They get a receipt in their email inbox that shows the amount paid. Car travel, however, doesn’t come with a receipt. Figuring out how much business travelers are owed for out-of-pocket spending on car travel is more complex.
That’s where mileage reimbursement policies are useful. We’re giving you the scoop on everything you need to know to understand mileage reimbursement and create a policy for it that your company’s business travelers will adhere to.
What is a mileage reimbursement policy?
Mileage reimbursement is the practice of paying employees back for out-of-pocket costs for gas used for corporate travel. When employees travel for work by car and use their own vehicle, or pay for gas in a company car or rental using their own funds, they can be reimbursed for the gas they used to get to that event, meeting, or other permissible destination.
The Internal Revenue Service sets a benchmark for standard mileage rate that determines how much companies can write off, and how much employees can be reimbursed, for each mile of business-related travel. As part of the IRS’ accountable plan regulations, standard mileage reimbursement does not count as an employee’s income and is therefore not subject to tax withholding.
The purpose of a mileage reimbursement policy is to outline how employees can track their mileage, what they need to do to be reimbursed for it, and which driving destinations they can and cannot expense. A mileage reimbursement policy is usually not a standalone document, but instead it is part of a company’s corporate travel policies.
How does mileage reimbursement work?
Standard mileage reimbursement covers work-related car travel beyond an employee’s commute from home to the office and back. Employees can be reimbursed for car travel to and from temporary work locations such as a client’s office or a convention center.
Any company that has employees who travel on its behalf in cars should have a mileage reimbursement policy.
So how is the Internal Revenue Service involved in mileage reimbursement? The IRS sets annual rates for mileage reimbursements. They are involved because companies can write off mileage as business expenses to lower their tax burdens. In the same way, self-employed people can reduce their taxable income and therefore save money by writing off work-related car costs.
This standard mileage rate was created to make it easier to calculate mileage reimbursements. Figuring out what percentage of your tank’s gas was used for business travel and how much that gas is worth is difficult to calculate. The IRS’ rate standardizes the value of one mile.
What is the IRS standard mileage reimbursement rate?
In 2020, the IRS standard mileage reimbursement rate is 57.5 cents per mile. In the past, the rate has grown for the most part. In 2019, it was 58 cents per mile, in 2018, it was 54.5 cents per mile, in 2017 it was 53.5 cents per mile, and in 2016 it was 54 cents per mile.
The IRS factors things like fluctuating gas prices, inflation, the costs of car ownership and maintenance, and economic forces into their annual mileage rate.
Why is it important to use the Internal Revenue Service’s standard mileage reimbursement rate? The IRS’ rate is optional to use, but it helps employees quickly and simply calculate how much they are owed for out-of-pocket expenses related to car travel. These rates help companies calculate a mileage deduction to reduce their tax burden. The IRS’ rate simplifies calculating this reimbursement by converting actual costs into a simplified calculation based on a mileage log or app. This estimate also helps companies in planning corporate travel.
Examples of mileage reimbursement policies
So how is employee mileage reimbursement calculated? Employees can calculate how many miles they drove to and/or from a work-related meeting or errand and multiply it by their company’s mileage reimbursement rate or the IRS’.
Business travelers can track mileage for out-of-pocket expenses in several ways. The old school method is to subtract your car’s odometer reading at the beginning of your trip from the reading at the end of the trip. If you are using a GPS or Google Maps to navigate to your destination, you can use the tool’s estimated mileage to prove how far you traveled. A third method is to use an app specifically designed for tracking work-related mileage. Bonus points if the app integrates with your company’s travel management software.
Here’s an example of how mileage reimbursement would work in practice. Let’s say that you have to drive to a meeting with a client. According to Google Maps, the round trip mileage from your office to your client’s office is 13 miles. Now let’s say that your company uses the standard mileage rate set by the IRS, which is 57.5 cents per mile in 2020. To calculate your reimbursement, you would multiply the mileage (13 miles) by the reimbursement rate ($0.575 per mile) to get $7.48. Since this trip meets the qualifications for an accountable plan, the reimbursement would not be taxable as the employee’s income.
Now that you understand how mileage reimbursement works, here are a few examples of policies to check out for inspiration:
- This policy from the University of Minnesota illustrates how to calculate mileage in different scenarios, such as if you are traveling from home, from the office, from the airport, etc.
- Northern Michigan University’s mileage reimbursement policy explains when you can and cannot be reimbursed for travel, such as if you are at a temporary work location or coming from a second job.
- The Principia School in St. Louis illustrates a reimbursement policy with a mileage rate that is lower than the IRS’ standard rate. It also sets standards for popularly deducted routes, such as to and from the local airport.
What do these and all effective mileage reimbursement policies have in common? They are simple to use, avoid jargon, and are easy to find on the institutions’ websites.
Don’t let bureaucracy get in the way of your business’ growth. Create a simple mileage reimbursement policy within your corporate travel policy to let your employees have business wins on the road without letting complex jargon and policies confuse them. Check out Lola.com’s blog for more travel policy advice, travel safety tips, and other helpful topics.