Only three states-California, Illinois, and Massachusetts-require private employers to reimburse employees for mileage. (Mileage reimbursement is required by federal law when a failure to reimburse would result in the employee being compensated at less than minimum wage for hours worked, however.) Employers must compensate employees for an amount equal to or greater than the actual cost of operating their vehicle for business purposes, including fuel, insurance, maintenance, and depreciation of the vehicle. Employers can do this in one of several ways, including providing a stipend to cover all costs of operating the vehicle, reimbursing employees based on the number of miles driven, reimbursing employees for their actual expenses, or establishing a fixed and variable rate (FAVR) plan to account for both fixed expenses, like insurance, and variable expenses, like fuel.
Contrary to popular belief, employers are not required to pay employees the IRS mileage reimbursement rate for all miles driven in states that require employers to pay mileage reimbursement. State law simply requires that employees are compensated for at least the actual cost of operating their vehicle for business purposes. Private employers who choose to provide mileage reimbursement to employees who use their personal vehicles for work are also not required to reimburse at the IRS rate. Private employers who choose to reimburse employees for mileage and are not located in a state that requires mileage reimbursement can reimburse mileage at any rate they choose.
Then how does the IRS mileage reimbursement rate come into play? The purpose of the IRS mileage reimbursement rate is to determine when the amount paid to the employee as mileage reimbursement crosses over from nontaxable to taxable income. Generally, reimbursement for necessary business expenses such as mileage is not taxable income. However, when an employee is reimbursed for mileage at a rate that exceeds the IRS mileage reimbursement rate, any amount in excess of the IRS rate becomes taxable income to the employee and must be reported.
Questions about mileage reimbursement? Contact the expert employment law attorneys at myHRcounsel for help complying with both federal and state law.
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