Is mileage reimbursement taxable? A guide for employers

It’s common practice for businesses to pay employees back when they incur costs using their personal vehicles for work-related travel. But the tax implications of these mileage reimbursements can be vexing for both parties and difficult to calculate. 

This guide will explore whether mileage reimbursement is taxable and how to report it correctly to ensure compliance with Internal Revenue Service (IRS) regulations.

What is mileage reimbursement?

Mileage reimbursement is a payment made by employers to employees to cover the costs associated with using personal vehicles for business purposes. This reimbursement typically includes expenses such as fuel, maintenance, and depreciation.

Common scenarios where mileage reimbursement is used include:

• Sales representatives visiting clients
• Employees traveling between multiple work sites
• Attending off-site meetings or conferences
• Running business-related errands

To avoid confusion over which types of travel purchases qualify as business expenses, employers typically implement internal spend policies that outline what is and isn’t reimbursable. In lieu of reimbursements, companies may also opt to give car allowances to employees who are frequently on the road to cover business costs and wear-and-tear depreciation. 

The IRS also sets standard mileage rates each year to clarify how much money per mile is reimbursable for business purposes. This also serves as a guideline for tax-deductible vehicle expenses. For 2024 taxpayers, the standard mileage rate for business use is 67 cents per mile.

When is mileage reimbursement not considered taxable income?

Employees often wonder, “Do you pay taxes on mileage reimbursement?” Workers typically don’t pay taxes on mileage reimbursements for business-related travel. But, there are caveats.

Mileage reimbursement is not considered taxable income only if it’s at or below the IRS standard mileage rates and part of an accountable plan, which means:

• The expense have a business connection
• The employee adequately accounted for the expenses within a reasonable period
• The employee returned any excess reimbursement within a reasonable period

Because of this, examples of non-taxable mileage reimbursements include professional–related travel like driving to meet a client, traveling between different locations during the workday, and attending a business conference in another city. 

When is mileage reimbursement taxable income?

Conversely, mileage reimbursement can be considered taxable income in the following situations:

The reimbursement exceeds IRS standard mileage rates

If employers reimburse employees at a rate higher than the IRS standard mileage rate, the excess amount is considered taxable income. For example, if an employer reimburses at $0.70 per mile when the IRS rate is $0.67, the $0.03 difference is taxable.

The reimbursement is part of a non-accountable plan

Reimbursements made under a non-accountable plan are treated as taxable income. A non-accountable plan is when the expenses are unrelated to the employee's job (e.g., a drive to the suburbs to see a friend in a city you’re visiting to attend a sales expo downtown). A non-accountable plan can also be when employees fail to return excess reimbursement to the employer within a reasonable timeframe

The reimbursement covers personal commuting expenses

Reimbursements for an employee's regular commute between home and their primary work location are generally considered taxable income.

The reimbursement isn’t supported by adequate documentation

If employees fail to provide proper documentation of their business mileage, the entire reimbursement may be treated as taxable income. Look for automated expense management systems that make it easy for employees to file reports and log travel. 

How to report mileage reimbursement correctly

To comply with IRS regulations, employers need to ensure their team members accurately report mileage reimbursements. Here’s how: 

For W-2 employees

If the mileage reimbursement is not taxable:

• The reimbursement should not be included on the employee's Form W-2.  
• The employee does not need to report the reimbursement on their tax return.

If the mileage reimbursement is taxable:

• The taxable portion is included in Box 1 (Wages, tips, other compensation) of the W-2 form.
• The employee must report this amount as income on their tax return.

For 1099 contractors

For independent contractors:

• Mileage reimbursements are typically included in the total amount reported on Form 1099-NEC
• Contractors can claim mileage deductions for their actual vehicle expenses (so long as it was for business-related purposes) or use the standard mileage rate on Schedule C of their tax return

Automate mileage reimbursement and tracking with Rippling

Managing mileage reimbursements are time-consuming and error-prone. Rippling's expense management automates the real-time tracking of company-wide expenses.

While most expense management solutions only allow for basic employee-manager approval chains, with Rippling expense management’s advanced policy engine, you can set hyper-custom policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated, multi-stage approval workflows that help you control spend, like sending every expense over $300 for approval from the employee’s direct manager and the company controller.

What’s more, Rippling auto-categorizes expenses to your general ledger in real-time, saving bookkeepers hours of work manually logging transactions from different vendors to the right expense categories and reconciling them at the end of reporting periods. 

With Rippling you can: 

• Automatically route expenses and bills to the right approver every time. 
• Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review. 

Close the books faster with AI-powered transaction categorization, and integration with your accounting systems.

FAQs about mileage reimbursement

What is the IRS rule for mileage reimbursement?

The IRS sets standard mileage rates each year for business use of a personal vehicle. For 2024, this rate is $0.67 per mile. Reimbursements at or below this rate are generally not considered taxable income, provided they are part of an accountable plan.

Is mileage reimbursement considered income?

Travel reimbursement, including mileage, is not considered income if it's part of an accountable plan and does not exceed the IRS standard rate. However, any amount that exceeds the standard rate or fails to meet accountable plan requirements may be treated as taxable income.

Do you issue a 1099 for mileage reimbursement?

For independent contractors, mileage reimbursements are typically included in the total amount reported on Form 1099-NEC. Contractors are responsible for reporting these reimbursements and claiming appropriate itemized deductions on their tax returns.

This blog is based on information available to Rippling as of October 31, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.