Payroll in Practice: 5.31.2022

Question: An employer is establishing a reimbursement policy for employees using their personal automobiles for business. The employer wants to know if it can reimburse the cost of tolls or fuel (given the recent fluctuations in gasoline prices) in addition to reimbursement for mileage using the standard mileage rate and, if so, whether there is a set amount for each gallon of gasoline?

Answer: The employer may reimburse the employee for miles driven at a standard rate. Under federal rules, the standard mileage rate for business use in 2022 is 58.5 cents per mile, up from the 2021 rate of 56 cents per mile. The rate is intended to include all operating costs of the vehicle, such as fuel, oil, repairs, insurance, and depreciation.

The standard rate does not include parking fees and tolls, which may be reimbursed separately.

The employer is not required to use the standard mileage rate and may pay any rate it wants to reimburse for mileage. However, if the rate exceeds 58.5 cents per mile, the excess must be included in the employee’s wages.

Any amount reimbursed to an employee who did not timely substantiate the miles and business purpose of the vehicle use must also be included in the employee’s wages.

Amounts paid to the employee, such as an allowance or advance that is not timely substantiated by the employee, must be included in wages unless any excess allowance or advance over the substantiated amount is returned to the employer on a timely basis.

The IRS has specified safe harbor rules regarding timely substantiation. Expenses are to be substantiated within 60 days of their incurrence and any excess allowance or advance is to be returned within 120 days of being provided to the employee. Any advances issued to employees must be based on a reasonable estimate of the expected expenses and must not be issued more than 30 days before the incurrence of the expenses.

As an alternative safe harbor for expense advances, the employer may issue periodic statements to employees that show any outstanding advances received by the employees. The statements must be issued at least quarterly, and the employee must return any unsubstantiated amount or substantiate expenses for outstanding advances within 120 days of the statement date.

Instead of using a standard mileage rate, the employer may choose to reimburse actual expenses substantiated by the employee. This requires that the employee substantiate the business use mileage, total mileage, and the operating costs incurred by the employee for the reporting period. The operating costs are prorated based on the percentage of the total mileage for the reporting period that constitutes business mileage.

Another method the employer may use is a fixed and variable rate allowance, which includes a combination of payments covering fixed and variable costs such as cents per mile for variable operating costs plus a flat amount to cover fixed costs. For details on this method see Revenue Procedure 2019-46 and Notice 2021-02.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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