If you own a small business, there is a good chance you use your personal vehicle for business purposes. And the IRS provides clear guidelines and tax deductions for that. But, if your employees use their personal vehicle for your business purposes, things can get tricky. Clearly established, written reimbursement policies and an accountable reimbursement plan can help avoid confusion and disappointment.
How to Reimburse Employees for use of Their Vehicle
There are two basic methods of reimbursement to consider, a car allowance aka employee vehicle allowance and mileage reimbursement.
- A car allowance is the dollar amount an employer gives employees for the business use of their vehicle. It is a set amount over a given period of time and should cover costs such as fuel, wear-and-tear, tires and more.
- Mileage reimbursement is when an employer pays their employees back for mileage and expenses incurred during the use of their vehicle once they have filed an expense report. Mileage reimbursement varies based on miles driven and expenses incurred.
It is important to determine the method of reimbursement that works for your business and that helps retain your valuable employees. It is even more important to let your employees know up front, how they will be reimbursed.
What is An Accountable Reimbursement Plan and Why do I Need One?
A car allowance or mileage reimbursement can be taxable income for your employees if you do not have an accountable reimbursement plan. This could lead to an unpleasant surprise for your employees. With an accountable plan, you do not have to report these as pay.
An accountable plan meets the following high-level criteria:
- Has a business connection
- Requires substantiation
- Returns excess amounts in a reasonable time
How to Get Started with an Accountable Plan?
First, we recommend a consult with your CPA. You can also find guidelines on accountable mileage reimbursement plans here.
Second, we recommend you set up an accurate and efficient record keeping system right away. And since we promote environmentally friendly administration, we found an app for that. MileIQ comes highly recommended and if you want to compare, start with this list of the “5 Best Mileage Tracker Apps For Small Business.”
Note: SmartPayroll Solutions is not affiliated with app providers.