Because outside salespeople tend to spend more time on the road than in an office, their mileage reimbursements can be fairly substantial. As the company paying these mileage costs, the guidelines don’t impose a standard method for figuring out the amount to reimburse your sales force. The mileage reimbursement method you choose, however, can adversely impact the amount of tax your salespeople end up having to pay.
General Mileage Reimbursement Tax Implications
Unless your mileage reimbursement policy for employees is an “accountable plan,” the Internal Revenue Service requires all payments to be reported as taxable wages on the salespeople’s W-2 forms. This rule applies irrespective of whether payment is made before or after the actual mileage is put on the car and regardless of whether you use the standard mileage rate — a fixed amount the federal government reimburses its own employees for each mile driven — or the actual gas and other car-related expenses incurred to figure out the amount to reimburse. And whenever mileage reimbursements are taxable, salespeople can take a job-related deduction for their car expenses if they itemize on Schedule A.
Accountable Mileage Reimbursement Plans
Your business’s mileage reimbursement policy must impose three requirements on its salespeople to be considered an accountable plan.
First and foremost, the plan must limit reimbursements to mileage costs incurred while conducting business. Each salesperson must then be required to substantiate or account for the mileage with documentation or receipts. Third, employees must return excess reimbursements and allowances to you. In other words, if you give one of your salespeople $1,000 on Oct. 1 to cover the anticipated mileage expense for the month, but he only spends $900 of it — he must have an obligation to return the $100.
Fixed Car Allowance
One way to simplify your company’s reimbursement process is to use the standard mileage rate, which as of 2013 is 56.5 cents a mile. By doing so, your salespeople won’t need to substantiate their costs with forms and receipts, and your business won’t waste valuable resources sifting through all those documents.
In other words, the accountable plan requirement that employees account for their costs is automatically satisfied with the standard mileage rate. Salespeople merely provide mileage or driving distances, they receive the reimbursement tax-free and your company then avoids paying the additional employment taxes it would owe on taxable reimbursements. Note that you can deduct all reimbursement payments as business expenses regardless of the tax implications to the salespeople.
Perhaps you’re a self-employed contractor who works strictly on commission. If any of your clients agree to reimburse you for the miles you drive when meeting with prospective buyers, the IRS gives you two options.
The first, which is available to all self-employed salespeople, is to include the reimbursement in the income you report on Schedule C and to deduct your mileage costs as a business expense. But if you provide your client with documentation, such as a weekly mileage invoice that’s based on a daily log you maintain, your reimbursement payments aren’t included in business income, which means you can’t, nor is it necessary, to take a deduction for the underlying car expenses.
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