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If you have employees, they may be using their own vehicles for your business needs. Of course, they may be able to deduct these expenses as miscellaneous itemized deductions on their own tax returns. But if they use their vehicles extensively, you will eventually have to compensate them in some shape or form, or face a very disgruntled workforce.
Many employers choose to reimburse the employees who do substantial amounts of business driving in their own vehicles. If you go this route, you'll want to make sure that any reimbursements you make are deductible for you. For your employees' sake, you'll also want to be sure that, as far as possible, the expenses are not taxable income to the employees. Remember that if the reimbursements are treated as taxable income, both you and your employees will have to pay payroll taxes on these amounts.
The deductibility of business expense reimbursements, including vehicle expenses, depends chiefly on whether the payment is made under an accountable plan.
Mileage allowances for employees. A simple way to reimburse your employees for their automobile expenses is to pay them a mileage allowance, based on the number of business-related miles they drive.
Your tax records will be less complicated if you use the standard mileage rate that's set by the federal government each year; however, you can pay the employees a higher rate if you wish, so long as the rate is reasonably designed not to exceed the employee's actual or anticipated expenses.
The amount of expense you can deduct is the lesser of:
- the amount you paid under your own mileage allowance
- the government's standard mileage rate multiplied by the number of business miles substantiated by the employee
If you use the mileage allowance method, your employee won't have to keep track of his or her actual car expenses, but will still need to keep written mileage records that show the time, place, use, and business purpose for each car trip.
Employers that have at least 10 employees using their own cars on company business can use an alternate method that combines periodic fixed and variable rate payments (the FAVR allowance method). The fixed portion reflects the vehicle's projected depreciation, insurance, registration, license, and personal property taxes, while the variable portion reflects those costs that vary depending on the number of miles driven. Using the FAVR method can become rather complicated, so we recommend that you ask your tax professional to assist you if you think you might want to use this method.
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