Drop in Mileage Rates

As you are probably aware, an employer’s reimbursements to employees for properly documented business expenses are not subject to payroll taxes, nor must such reimbursements be reported on the employee’s tax return. This tax-free treatment applies in the case of a mileage allowance, but only if the reimbursement rate is no more than the IRS-approved standard mileage rate.

To the extent a mileage allowance exceeds the standard mileage rate, it’s considered made under what the IRS refers to as a nonaccountable plan. This means that such excess is not only taxable to the employee, but also subject to income and payroll tax withholding.

The IRS standard mileage rate for the last six months of 2008 is 58.5¢ per mile. For 2009, the rate will decrease to 55¢ per mile. Thus, for reimbursements made after December 31, 2008 for mileage incurred after this date, 55¢ per mile is the maximum rate at which you may reimburse employees for the use of their vehicles in your business activities without incurring a payroll tax or withholding liability related to the reimbursement. If you choose to reimburse employees at a higher rate (for example, by continuing to use 58.5¢ per mile after December 31), the excess over 55¢ per mile is treated as additional compensation to the employee and is subject to income and payroll tax withholding.