If you manage a business or use a vehicle for business purposes as an employee, an important aspect of that is tracking your miles, along with figuring out how mileage tax works. Today we’ll be taking an all-encompassing look at mileage reimbursement, addressing questions such as “how much should I be reimbursed for mileage?”, “what is mileage tax”, or how to calculate mileage reimbursement. We’ll be covering these questions and more – read on for a breakdown of how this important aspect of business best practices plays out in reality.

How Does Mileage Reimbursement Work?

Generally speaking, the category of mileage reimbursement refers to many things, but can fundamentally be viewed from two perspectives; that of an employee or from the standpoint of a business owner looking to provide an accountable plan for their employees. Fixed costs and variable costs related to the operation of a vehicle tend to be quite significant – an employee left without a good plan can take a serious hit to their income.

On the flip side, a business owner who provides those employees with a subpar plan could face the loss of those employees – most workers expect a decent plan and compensation for their business mileage; this is standard across the country.

Without further ado, let’s break down the types of plans that are typical for mileage reimbursement, examining them a little more closely.

The Federal Mileage Rate

Certainly, the most commonly used category for employee mileage reimbursement rules is the federal mileage reimbursement rate, which as it happens is exactly the same as the standard mileage rate used by self-employed persons. The Internal Revenue Service (IRS) sets that rate every year – in 2022 it is 58.5 cents per mile driven. This rate keeps things pretty simple; as it encompasses all costs related to the operation and maintenance of a vehicle in a general sense. Let’s say a person does 10,000 miles for their employer in a given year – this translates very easily into $5,850 for mileage reimbursement, often paid on a monthly basis.

A Car Allowance

Keeping things extra simple, a car allowance is merely a fixed amount that employees receive, typically on a monthly basis. Some employers like this method best because it’s easy and may be tailored to the specific area in the States where their employees operate and maintain their vehicles. It is, however, important to note that a car allowance can sometimes be deficient – some employers pay their workers less than would be considered reasonable under the current rising gas prices.

A Combination of Both (FAVR)

The acronym itself refers to the delineation of two categories: fixed and variable rates. Employers who use FAVR (pronounced as in favor) give their employees a concrete amount for fixed costs, e.g. insurance, depreciation, or registration costs.

The variable part of the reimbursement for mileage under FAVR is a cost-per-mile rate determined by the employer. This cost-per-mile rate is, in most cases, significantly lower than the 58.5 cents offered by the federal mileage rate, because that rate operates on a general overview of all of the costs associated with the operation of a vehicle. FAVR can often be a good balance between something resembling a car allowance and general variable costs which relate more to maintenance and the price of gas or oil.

Accountable Plans

One essential aspect of mileage reimbursement relates to what the IRS calls an accountable plan – this is a plan whereby the costs associated with the usage of the vehicle relate specifically to business activities performed by an employee.

Accountable plans in the context of mileage reimbursement function as fundamentally tax-free, i.e. they are not subject to W-2 tax reporting or withholding taxes, which are a certain amount of an employee’s wages that are not included in their salary.

For information about more specific requirements under an accountable plan, consult your accountant or the IRS’s website directly.

How do You Calculate Mileage Reimbursement?

Naturally, it really depends on what kind of plan you are on or use for your employees. When you receive a car allowance, then you don’t need to calculate anything – unless of course if you want to figure out whether or not your current allowance is sufficient when compared to the more typically used federal mileage reimbursement rate.

Outside of that, generally, you are going to work with a cost-per-mile rate and go from there. Simply multiply that rate by the miles you’ve driven as an employee and you will find out exactly how much reimbursement you are entitled to.

Now let’s move on to some more specific examples where we examine the following situations, all of which are fairly common:

  • An employee drives a privately owned vehicle for business working for a company
  • An employee uses an automobile for car mileage which is provided by the company
  • Someone is self-employed

Concrete Mileage Reimbursement Examples

  1. The first of these is perhaps the most common of all – a situation where an employee uses their own vehicle in the service of a small business or larger enterprise company. Let’s take Desiree: she drives a Suzuki Swift and works as a life coach as a part of a larger collective of coaches. Desiree’s employer chooses the federal mileage rate because it’s the easiest from an administrative point of view; this means that when she does her typical business mileage of 7000 miles per year, she receives $4,095 throughout the year, or, $341.25 per month.
  2. Jacob is a project manager for a large IT company based out of Denver, Colorado. His company provides him with a BMW i4 for his business miles – Jacob often meets important clients and needs to maintain a classy outward impression. His company also takes care of the fixed costs related to the BMW, meaning that he gets a cost per mile rate indicative of this arrangement. Currently, that rate is 43 cents per mile, which is ideal for Jacob given that he often goes away on long business trips to clients out of state. Last year he did a total of 31,000 business miles, entitling him to receive $13,330 in total for mileage reimbursement that year.
  3. If you’re wondering how you deduct mileage on taxes while self-employed, it’s fairly elementary: you simply do it through the IRS rather than your employer. This category actually falls outside of mileage reimbursement, though the thing is, being self-employed is really not so different – you still have to keep track of your mileage using some kind of mileage log, and the rate itself is the same too, at least if you choose the standard mileage rate. The standard mileage rate for 2022 is 58.5 cents per mile driven, i.e. exactly the same as the federal mileage reimbursement rate.

The Best Mileage Tracking Options

While many people still choose to do their tax accounting tasks through Excel, we live now in a time where a veritable smorgasbord of apps can do most tasks much more efficiently than we humans can, and mileage logging is no exception. There are tonnes of accounting software out there, but in our experience, the best choice is an app which specializes in mileage tracking specifically. There is certainly a great deal of software that does just that, though for the purposes of mileage reimbursement one app stands out from the rest: MileageWise.

Built with a number of features unique to the mileage tracking app market, MileageWise’s software boasts many advantages; among them an in-built IRS auditor and three auto-tracking methods. Best of all though – the provider’s team’s dashboard allows you to create easy workflows for employees tracking their mileage reimbursement, and the software even allows the integration of a cost-per-mile travel rate that is appropriate for what any given employer has chosen as recompensation for their workers. We’ve spent time with the app and its accompanying web dashboard personally – along with other apps – and the conclusion is clear, MileageWise’s is the best.