HR Question: Mileage Reimbursement

Q: Are there any limits on the amount an employer can reimburse employees for mileage before taxes are assessed?

A: The type of reimbursement plan you have will dictate whether reimbursement for business travel is or is not taxable.

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 (FUTA) Taxes. Your reimbursement or allowance arrangement must meet all three of the following in order to quality as an accountable plan:
 

  1. 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. If not reimbursed by the employer, the expense would be deductible by the employee on his/her 1040 income tax return.
  2. There must be “adequate” accounting by the recipient within a reasonable period of time. This means that your employees must verify the date, time, place, amount and the business purpose of the expenses (such as on an expense report). Receipts are required unless the reimbursement is made under a per diem plan.
  3. Excess reimbursements or advances must be returned within a reasonable period of time.

The other type of plan that is taxable, subject to all employment taxes and withholding is called a “nonaccountable plan”. Your payments would be considered treated as paid under a nonaccountable plan if: (1) your employee is not required to substantiate expenses to you with receipts or other documentation in a timely manner; and (2) you advance an amount to your employee for business expenses and your employee is not required to and does not return any amount s/he does not use for business expenses in a timely manner.

Please check with your state department of taxation for state tax rules.

For more detailed information on federal mileage reimbursement, please refer to Publication 15, Circular Ehttp://www.irs.gov/pub/irs-pdf/p15.pdf, and Employer’s Tax Guide; Publication 1542, Per Diem Rateshttp://www.irs.gov/pub/irs-pdf/p1542.pdf.

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06/26/14 4:06 AM

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