Ques­tion: Are amounts an employ­er reim­burs­es employ­ees for mileage taxable?

Answer: They may be; the type of reim­burse­ment plan will dic­tate whether reim­burse­ment for busi­ness trav­el is or is not tax­able. Both account­able plans and non-account­able plans allow an employ­er to reim­burse employ­ees for their busi­ness expenses.

With an account­able plan, the reim­burse­ment is not tax­able to your employ­ee. Amounts paid under an account­able plan are not wages and are not sub­ject to income tax with­hold­ing and pay­ment of Social Secu­ri­ty, Medicare, and Fed­er­al Unem­ploy­ment Tax Act (FUTA) tax­es. Your reim­burse­ment or allowance arrange­ment must meet all of the fol­low­ing con­di­tions in order to qual­i­ty as an account­able plan:

  • There must be a busi­ness con­nec­tion to the expen­di­ture. This means that the expense must be a deductible busi­ness expense incurred in con­nec­tion with ser­vices per­formed as an employ­ee of the employ­er. If not reim­bursed by the employ­er, the expense may be deductible by the employ­ee from their tax­able income.
  • There must be ade­quate account­ing by the employ­ee. This means that the employ­ee must give their employ­er a state­ment of expense, an account book, a diary, or a sim­i­lar record in which they entered each use at or near the time it occurred, along with date, mileage, and the busi­ness pur­pose of the use.
  • Excess reim­burse­ments or advances must be returned with­in a rea­son­able peri­od of time.

A non-account­able plan does not meet the three require­ments for account­able plans and is sub­ject to all employ­ment tax­es and with­hold­ing. Pay­ments under a non-account­able plan occur if: (1) the employ­ee is not required to sub­stan­ti­ate expens­es with receipts or oth­er doc­u­men­ta­tion in a time­ly man­ner; and (2) the employ­er advances an amount to the employ­ee for busi­ness expens­es and the employ­ee is not required to, and does not, return any amount he or she does not use for busi­ness expens­es in a time­ly manner.

Employ­ers should also check with their state depart­ment of tax­a­tion to under­stand any state tax rules applic­a­ble to them.

For more detailed infor­ma­tion on fed­er­al mileage reim­burse­ment, see the IRS page con­tain­ing Pub­li­ca­tion 463, Trav­el, Enter­tain­ment, Gift, and Car Expens­es, and updates to this pub­li­ca­tion since its pub­li­ca­tion date.

 

Orig­i­nal­ly post­ed on ThinkHR.com