While it would be nice to be able to provide your employees with a company car, this isn’t always a possibility. Many business owners have employees whose job requires them to drive as a part of their daily duties. One option you have as a business owner is to reimburse your employees for their business mileage under an “accountable” plan. This means your employees must submit mileage logs either weekly, monthly, quarterly, however often you choose, and then reimburse them the standard IRS mileage rate of 53.5 cents per business mile for the 2017 tax year. This reimbursement is not included on the employee’s W-2 as taxable wages, and as the business owner, you get a deduction for auto expense.
From a more practical standpoint, you may choose to reimburse your employees a standard amount each month for business mileage. This is considered a “nonaccountable” plan, which is then taxable to the employee as wages. However, you can turn this into an accountable plan by following the set of rules below.
You can pay your employees a set amount each month and any amounts paid in excess of the IRS standard mileage rate are considered made under the “nonaccountable” plan portion and would be includable in the employee’s taxable wages. At the end of the year, before W-2’s are issued, you need to request that employees turn in their business miles for the year through a substantiated mileage log. To determine any amounts paid under the accountable plan portion, multiply the business miles times the standard 53.5 cents per mile and any excess payments to the employee would then be included on the employee’s W-2 subject to withholding and employment taxes.
Your business gets to take a deduction for the payments under the accountable plan as automobile expenses and the payments made under the nonaccountable plan are deductible as employment wages. You do not have to have a specific written plan in order for this to qualify as an accountable plan. We do recommend that you have each of your employees read and sign a memo indicating they understand and accept their responsibilities and the related tax consequences.
When you are not able to provide a company car to your employees, you still have the option to help reimburse them for the business use of their autos while still getting a deduction for your business. Please consult your accountant if you have questions or need additional help getting your employees started on a mileage allowance.