As searches online make clear – many people wonder ‘how much should I be reimbursed for mileage?’ or indeed are concerned in general with how to calculate mileage reimbursement in 2022. The truth is complicated, whether you are driving a privately owned vehicle or are concerned with things from a tax accounting perspective as a small business owner. In this article, we’ll dig deep into the different aspects and options available for employees and employers alike – paying special attention to the best ways how to deduct mileage on taxes.
Understanding Mileage Reimbursement
Broadly speaking, mileage reimbursement is concerned with how business mileage is accounted for by those who either work for a company or manage that company. It is applicable in many, many organizations across the U.S., whether they be small businesses or large corporations. The uniting factor is that employees use either a privately owned vehicle or a company car for business purposes – later receiving reimbursement for mileage and other associated costs. These payments are made by employers, and are generally tax-free, barring some situations.
Additionally, it is worth knowing that not every state requires employers to have a plan at all, though California does make it compulsory. It is also the decision of an employer exactly how they choose to reimburse their employees; there are numerous options. Let’s explore some of those options.
The Federal Mileage Rate in 2022
The federal mileage rate serves as a kind of industry standard, whereby many employers simply choose to use what is most commonly referred to as the federal mileage reimbursement rate. This rate itself is 58.5 cents per mile as of 2022 – a rate that reflects general costs on travel rates including such things as gas prices, oil costs, and the fixed costs associated with the operation of a vehicle. The Internal Revenue Service (IRS) comes up with new rates every year – this is done through a variety of market analyses.
Interestingly, for those asking “what is the federal mileage rate?” one answer is that it is simply the more commonly known standard mileage rate, which stipulates the exact 58.5 cents per mile and is most commonly taken on by self-employed persons. In one scenario employees create mileage logs for their employers, and for independent contractors, those logs go directly to the IRS. It is important to understand, however, that self-employed people have a different set of choices.
Implementing a Custom Mileage Rate
For whatever reason an employer chooses, a custom cost-per-mile rate can be optimal. This rate can be higher or lower than the federal rate, though typically it is lower. In the rare cases that a rate higher than 58.5 cents per mile is implemented – excess gains above this rate are not tax-free.
Regardless – lower rates are far more common – for example, your employer may choose a rate of 48 cents per mile driven for your car mileage. This could be because an employer feels that their employees use their vehicles a lot outside of work, thus making the fixed cost portion of the federal rate somewhat redundant. It may also be that an employer is simply stingy, and they have decided to implement a custom rate to save money.
Using a Car Allowance
Car allowances are lump sum payments paid by employers to employees for all of their vehicle-related costs. Traditionally these are paid monthly, though again, it is up to each individual company or organization how they choose to pay your reimbursement.
This method can also sometimes be problematic purely from the point of view of the employee – in a market like our current one where gas prices are soaring, reaching all-time highs sometimes on a daily basis – a fixed car allowance for a defined period can feel like a punch in the stomach. If you’re unhappy with your current reimbursement policy, consider asking your accountant crucial questions like “what is mileage tax?” – getting detailed responses from experts tends to help a lot.
You could also go to your employer with the goal of having a discussion about reimbursement policy – just don’t expect them to budge – it’s perfectly within employee mileage reimbursement rules to implement a disfavorable plan like a car allowance can sometimes be.
A Combination of the Two (FAVR)
The incorporation of both a fixed and variable rate is at the core of FAVR policy. More succinctly, fixed rates account for costs such as registration (or ownership of a vehicle), depreciation, licenses, and insurance. On the end of variable costs – which are covered by a given cost per mile amount – we’re accounting for things such as maintenance and gas oil.
Because fixed costs are of course fixed, employers tend to also pay a lump sum amount to employees for this element. Similarly, the variable amounts might feature low cost per mile rates, because, unlike the 2022 IRS mileage rate, they are not meant to address all aspects relating to running a vehicle and maintaining a vehicle.
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The IRS’s Notion of an Ac
countable Plan
Before we round this section up, it is important to understand how the above plays into the IRS’s idea or notion of an “accountable plan”, paying mind to its different facets. It is important from a best practices point of view, for employers and for less-educated employees who are still wondering “how does a mileage tax work?“.
To the letter of the law, pulled directly from the IRS’s website – the below comes from publication 463, the IRS’s 2021 guide to “Travel, Gift and Car Expenses.” This is the latest version, and the following three points are directly quoted for your benefit:
- Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
- You must adequately account to your employer for these expenses within a reasonable period of time.
- You must return any excess reimbursement or allowance within a reasonable period of time.
For more information about accountable plans and their application for mileage reimbursement scenarios, you can navigate to all the rules and their finer details on this dedicated mileage reimbursement webpage.
Some Examples of How to Calculate Mileage Reimbursement
To help elucidate the situations that we covered earlier, we are now going to examine a few scenarios that help contextualize things a little better.
- Devon works as a lawyer for a large corporate firm, and his employer offers him the federal mileage rate on the miles he drives. Generally speaking, he does about 4,000 business miles per year, meaning that he qualifies for $2,340 in reimbursement payments annually.
- Charity is a life coach who visits many clients across her home city of Albuquerque, New Mexico. She is employed by a talent agency that manages her along with countless influencers. Charity’s employers offer her a FAVR arrangement for the miles she drives in service of the agency – and she drives a lot of miles. Because Chantae receives a fixed amount on top of the miles she does, her cost per mile is 38 cents. In total, last year she drove a total of 36,232 miles – visiting conferences across the country. If she does the same amount of miles in 2022, she’ll qualify for $13,768.16 as part of her variable rate under FAVR, along with an agreed-upon fixed amount for that portion.
- Mischa is a writer who works in marketing for a game company, and as part of her job, she drives a fair amount around her city. Her employer, however, has decided upon a fixed car allowance which pays her $300 extra per month. Luckily, this $3,600 yearly sum is enough for Mischa to cover the majority of her costs.
The Best Mileage Tracker Apps for Reimbursement
If there was ever a debate, it’s long since ended – tracking your mileage is an important part of claiming reimbursement – and the best way to do it is through a mileage tracking app. In fact, these days many companies mandate a mileage tracking app for their employers; saving time and money in the process.
The thing is, choosing the right app is tough. That’s why we’ve prepared a top-down view of the most important thing about this market and the software it offers: the features of the best mileage tracker apps available.
As you can see, there are quite a few apps out there that offer a lot in the way of features. It’s also not hard to see who’s on top – a newcomer by the name of MileageWise. Sure, most apps offer automatic tracking on some level, but this provider has three auto-tracking modes – Bluetooth, vehicle movement monitoring, and Plug’N’Go phone charging technology.
There are also notables in Everlance, TripLog, and MileIQ – all of whom have been in the market for a long time with fairly large client bases. In the end though, for us – MileageWise coming out on top was down to two main factors:
- Retrospective mileage logging or backtracking: If you pay for their full version, the web dashboard portion of this mileage tracker app can help reconstruct mileage logs from foregone years which could become relevant if you are being audited by the IRS as a self-employed person.
- Comprehensive team dashboard: Optimizing the recording of mileage reimbursement is no easy task, but a shared team dashboard with erudite workflows can help make the process easy – we found MileageWise’s especially useful. It is important to note, however, that many providers do offer a team dashboard – we just found MileageWise’s to be among the most intuitive.
- In-built IRS-proof AdWise technology: The company provides something no other competitor on the market does – an AI-based auditor feature that checks your log for errors in the context of your odometer readings and costs. In fact, some users might be perturbed by the fact that it doesn’t even let you print out a mileage log until everything is perfect – but it does make sense: getting your mileage logs right is serious business.
At the end of the day, you should do the research required to make the best decision about purchasing a mileage tracker app. You could go with a free one too, but the reality is that the features themselves are limited when you go free. Everyone knows the saying “you get what you pay for” – and the same is true with mileage software.
