Paying Employees More Or Less Than the Standard Mileage Rate
The IRS Standard Mileage Rate is the rate provided by the IRS for mileage reimbursement for business use of a personal vehicle. In 2015, the rate is 57.5 cents per mile. The rate is a guideline based on average gas prices and average wear and tear on a vehicle (gas reimbursement is a part of this rate).
Some people want to know if they can reimburse less than the standard rate. The answer is yes. Others want to know if they can reimburse more. The answer is also yes.
The IRS sets the rate for two reasons:
- To give employers a fair rate for paying back employees when they drive their own personal vehicles for work.
- To give employees a rate which they can use to deduct mileage on their taxes if the employer doesn’t reimburse or doesn’t reimburse the full amount.
It’s OK to customize the mileage rate based on what makes sense for your specific set of circumstances.
Reasons You Might Want to Reimburse Less Than the IRS Rate
The IRS rate is based on average gas prices, average wear and tear on a vehicle, and the average costs associated with that repair. Obviously, these prices will be a little different in different parts of the country. Just about everything is more expensive in New York and California than it is in Kansas so there is room for adjustment on the part of the employer.
There may be any number of reasons an employer might have for adjusting the rate. Here are just a few:
Lower gas and repair costs
In the West and North-East, for example, gas prices are the highest. In the South (minus Florida) and parts of the Midwest gas prices are the lowest. Take a look at Gas Buddy to see a color coded map of the gas prices across the US. Prices of labor for car repair also varies by region.
It would be no surprise if an employer in Mesquite, Texas didn’t want to reimburse as much as an employer from San Jose, California did. It doesn’t cost as much to fill the tank and it doesn’t cost as much to get the brakes replaced.
Employee drives a fuel efficient car
If the employee drives a super fuel-efficient car, like a Prius or even great new compact car, then filling up the tank is going to happen less frequently than if the employee were driving a 1997 Ford Explorer. Of course, the employee will be paying for that gas savings in the form of a higher monthly payment, so maybe it all evens out in the end.
Employee leases a car
Another reason an employer might decide to give an employee less than the average mileage rate could be because the employee is leasing the vehicle he uses for business trips. In the two years that the employee leases that car, he probably wouldn’t do anything more to it than get the oil changed.
If the employee were in Denver, Colorado, where gas prices have been averaging about $3.00 per gallon, he was leasing a new Chevrolet Sonic Eco which gets 40 miles to the gallon, and he was only going to get an oil change every 5000 miles, then the costs of driving 100 miles a week for work would be:
- $375 in gas after 50 weeks (He only needs 2.5 gallons of gas per week. That amounts to $7.50 per week. Take this times 50 weeks and you get $375.)
- $25 oil change after 5000 miles (once – for work – in 50 weeks)
The employee only has to spend $400 on business driving expenses for the whole year.
If the employer were to reimburse at the full IRS rate, he would be giving the employee $2,800 (based on the 2014 rate of 56 cents per mile). This is quite a bit more than the employee needs to be reimbursed – unless the employer just wants to help with the car payment. Now, reimbursing at the IRS rate is fine, but may not be necessary in this scenario.
The good news for the employee is that if his employer does decide to reimburse less than the full rate, he can deduct the rest on his taxes, regardless of how awesome his leased car is.
Reasons You Might Want to Reimburse More
Not everyone can afford to drive such a great car for work. Most delivery drivers have old cars and sales people who drive their own vehicles don’t always have the nicest cars either. Short of leasing, it’s hard to see why anyone would want to beat up their own car for their job. It’s costly and annoying to have to take your car to the shop for one problem after the other.
Employee drives an old SUV
Most employees drive clunkers for work and so their repair and gas needs are going to be on the higher end. The employee who lives in San Jose, where gas has been averaging about $3.5, and drives the 1997 Ford Explorer gets about 17 miles per gallon. If he drives 100 miles per week then he’ll need $1029 in gas after 50 weeks. That’s quite a difference from Mr. Fuel efficient! Chances are he’s also going to need new shocks and who knows what else in that year. He could easily need $1000 at any given moment for a repair, maybe twice in a year. If this were the case, the employer might want to reimburse slightly more than the average rate.
Employer gives a set “mileage allowance”
The employer may not want to calculate his mileage payments based on the actual number of miles the employee drove. He may not want to do any calculations at all. This is fine as long as he comes up with a fair number that the employee is happy with. If the employer gives the employee $50 each week for whatever he needs for his vehicle and he sometimes drives a lot and sometimes a little, it might all even out, it might end up being less, and it might end up being more than the average rate would account for.
It’s important to know, however, that the IRS counts excess mileage reimbursement as wages and so the employee would need to claim that excess on his taxes.
Another important thing to know is that employees need to keep mileage records if they are either receiving payments from their employers or if they plan to deduct the mileage on their taxes.
Mileage Reimbursement and Employee Retention
An employer can choose to reimburse employees less or not at all, although this may not be a great retention strategy! Not reimbursing employees for mileage can make them feel undervalued.
The last thing you want is an unhappy sales person. Not only will they not be effective at gaining new customers and closing deals but they may spread a bad word about the company while they’re out on business.
Likewise, you’re not going to want an unhappy delivery driver either, one who picks up or drops off orders and is in charge of stock. Unhappy employees don’t take care of business very well so it’s better to make employees happy.
But remember, you can claim your own business expenses on your taxes so you aren’t seeing a total loss on the payments to your employees.
And lastly, it is actually pretty common for employers to reimburse their employees for mileage. A BLR Survey found that 73% of respondents (144 in total) reimbursed employees the max IRS rate.