Deciphering Mileage Reimbursement Rates: Guidelines, Calculation Methods, and Impact on Business Travel Expenses
Employees travel to various locations for work. Some work travelers opt for car rental or ride-sharing services, while others use their personal vehicles for work. Employers use mileage reimbursement as a strategy to compensate employees for using personal vehicles for work purposes.
However, each employer calculates the mileage reimbursement rate in a distinct way. For instance, some companies compensate employees by paying monthly vehicle allowances. At the same time, many companies reimburse mileage based on a per-mile rate.
Also, they help employees track mileage by implementing a business travel management platform. We are making it easier for your organization to determine mileage reimbursement rates by discussing important guidelines and commonly used calculation methods.
Guidelines for Mileage Reimbursement Rate Calculation
While crafting a mileage reimbursement policy, you are not bound to follow a set of guidelines. Likewise, you can determine mileage reimbursement rates in several ways. We suggest some best practices and guidelines companies follow to streamline the mileage reimbursement process.
Federal employment laws do not require employers to reimburse mileage expenses. However, they require employers to reimburse expenses employees incur for work purposes. However, laws in several states require employers to compensate employees for using their vehicles for work purposes. Hence, you must consider both federal and state laws while setting mileage reimbursement guidelines.
Tax laws consider mileage reimbursements as legitimate business expenses. Hence, employers can claim tax deductions by showing mileage reimbursements like other travel expenses. Likewise, employees need to pay tax on the additional amount they receive as mileage reimbursements. Your policy needs to ensure that you are not overcompensating employees while calculating flat vehicle allowance or mileage reimbursement rates.
Rate Calculation Method
As noted earlier, you can calculate mileage reimbursement rates using multiple methods. But you can make it easier for employees to claim mileage expenses by clearly mentioning the rate calculation method. The clarity will make it easier for your employees to submit mileage expense claims. Also, it will help your finance team track and reimburse mileage expenses.
Non-Reimbursable Mileage Expenses
The IRL requires employers to reimburse mileage expenses when an employee uses his vehicle only for necessary and approved purposes. Your policy must clearly define when an employee can claim mileage reimbursements. For instance, you must define approved trips like client meetings, business conferences, official meetings, and site visits. At the same time, you must define non-reimbursable mileage claims, like an employee using his vehicle to commute to the workplace or perform personal chores while traveling for business.
Your policy must focus on streamlining the mileage reimbursement process. By providing ready-to-use templates, you must make it easier for employees to claim mileage reimbursements. The templates will ensure that employees provide important information like destination, purpose, date and time, and distance covered. However, using a business travel management platform, you must consider automating mileage calculation and reimbursements.
Methods for Mileage Reimbursement Rate Calculation
Companies nowadays calculate mileage reimbursement rates differently. They use methods that enable them to reimburse mileage expenses without tracking the actual amount paid by an employee. Here are three commonly used methods you should consider while calculating mileage reimbursement rates.
1. Flat Vehicle Allowance
It is one of the simple and straightforward methods for calculating mileage reimbursement rates. This approach requires your company to pay a flat monthly allowance for employees for using their personal vehicles for work purposes.
However, you can encourage employees to use their personal vehicle for work purposes only when the allowance covers the fuel cost, parking fees, wear and tear cost, and similar expenses incurred by the employee.
2. Standard Mileage Rates
This method requires you to reimburse the mileage expenses incurred by an employee based on the total miles he traveled for business purposes. In several countries, government agencies define federal or state mileage reimbursement rates per mile.
For instance, the Internal Revenue Service (IRS) updates and releases standard mileage rates yearly. You can use the federal or state rates to reimburse mileage expenses at the standard rate. However, you must streamline the reimbursement process by defining guidelines clearly.
It is always essential to help employees calculate and track mileage by implementing the right travel management software. Additionally, you must make it easier for employees to submit expense claims by providing templates.
3. Fixed and Variable Rate Allowance
The IRS allows employers to compensate employees by paying fixed and variable rate allowances. As the name suggests, the monthly allowance has both fixed and variable components. The fixed components include registration fees, licensing fees, insurance premiums, depreciation, and taxes.
On the other hand, the variable components are maintenance, fuel cost, and tire wear. You can consider this method to compensate employees for mileage and other costs. However, your company can claim tax exemptions only by recording the allowances comprehensively.
Impact of Mileage Reimbursement Rate on Business Travel Expenses
Employees incur various expenses while engaging in domestic or international business travel. Employers reimburse the travel expenses incurred by employees after reviewing the expense reports submitted by them.
They streamline the travel expense reimbursement process by implementing well-crafted policies. Also, they boost travel expense tracking, reimbursement, and auditing using a robust travel management platform.
Mileage expenses belong to a distinct category of travel expenses. Your organization must boost employee productivity and reduce employee financial burden by accelerating mileage reimbursements. At the same time, real-time mileage expense tracking helps you predict cash flow, make budgets, optimize tax returns, and make informed financial decisions.
Many employees these days use their personal vehicles for business purposes. Travel management platforms compensate for using personal vehicles for work purposes by reimbursing mileage expenses. They follow several guidelines and use various methods while calculating the mileage reimbursement rate.
Also, most employers these days automate mileage tracking by implementing a corporate management platform. That is why; you should consider both legal requirements and employee agreements to determine the correct mileage reimbursement rate.