Introduction: What is a mileage reimbursement?
In recent years, California has set itself apart from most states by introducing meticulous business expense reimbursement regulations. Consequently, it has emerged as one of the most employee-friendly regions in the United States. The mantra is straightforward: every single expense sustained by employees concerning their employer’s business must be reimbursed, per the California Labor Code stipulations.
But what exactly is a mileage reimbursement? Put simply, it describes when an employee drives their own car for work and employers pay them back for the expenses of business use driving. There are several ways of getting workers money for vehicular costs. Each one has its own merits:
- Hybrid models: These are typically known as Fixed and Variable Rate (FAVR) reimbursements, which account for fixed costs (e.g., insurance) from variable costs (e.g., fuel) and reimburse them accordingly. Fixed expenses are reimbursed in lump sum, while variable costs are calculated based on an agreed-upon mileage rate. This method ensures fairness between employees with varying mileage patterns.
- Lump-sum payments: Employers can offer a predetermined fixed amount, commonly referred to as a “per diem,” a “gas stipend,” or a “car allowance,” which are intended to cover all vehicle-related expenses. This method suits individuals with consistent routes and/or predictable mileage. Under the lump-sum umbrella are setups like Tax-Free Car Allowances (TFCAs). TFCA plans provide similar tax benefits to FAVR but may be more suitable for certain vehicle reimbursement scenarios. TFCA is preferable in situations where FAVR compliance measures are not desired, i.e., when there are fewer than five employees or when fewer than 5,000 miles are driven per year, and insurance verification is not required.
- Cents per Mile mileage reimbursement: Employers and employees can agree on a per-mile reimbursement rate, which typically aligns with the suggested rates provided by the Internal Revenue Service (IRS) or the California Department of Human Resources. While less personalized than FAVR, CPM can be effective if employees only occasionally use personal vehicles for work. Mileage tracking is crucial here, allowing reimbursements based on the number of business miles driven.
- Actual expenses reimbursement: This method requires meticulous recordkeeping to document all relevant costs, including fuel refills, maintenance, depreciation, and insurance. Employees can claim a percentage of the associated expenses by accurately recording miles driven for work purposes.
With these categories in mind, this article explores how mileage reimbursements work in California. We will specifically offer comprehensive answers to the following:
- What is the California mileage reimbursement rate for 2023?
- What are the rules for mileage reimbursement in California?
- What is the California state law on mileage for jobs?
By the end of this post, whether you are an employer or employee residing within the Golden State, you’ll better appreciate how mileage reimbursement is overseen.
California mileage reimbursement tax and labor laws
As of January 1st, 2023, the IRS business mileage reimbursement rate increased to 65.5 cents per mile, which applies to electric, hybrid-electric, gasoline, and diesel-powered vehicles. Although no federal law mandates employers to match the IRS rate, states like California have specific requirements for reimbursing employees for business expenses. California Labor Code Section 2802(a) specifies that employers must indemnify employees for necessary expenditures incurred as a result of fulfilling their duties on the clock; in this context, “necessary expenditures” encompass “all reasonable costs” according to Section 2802(c).
For jobs requiring time on the road, where no company vehicle is provided, the employer effectively makes vehicle ownership a condition of employment. Consequently, expense reimbursement must include car ownership expenses such as depreciation, taxes, insurance, registration, and factors like increased depreciation and maintenance due to business miles driven. Gas prices and car insurance also play a role, varying by location and travel distances.
What is the California mileage reimbursement rate in 2023?
While the federal reimbursement rate of 65.5 cents per mile serves as a baseline minimum, California itself lacks a specific minimum rate, leaving room for employees to argue for fair compensation in class-action lawsuits. In other words, without a state rate minimum, there is more incentive to legitimize requests for reimbursements. Compliance with California law is, after all, reimbursing employees for the exact cost of driving. Thus, comprehensive reimbursement policies could perhaps be useful for staving off unpleasant legal scenarios.
California average mileage reimbursement rates
When it comes to mileage reimbursement, California stands out with an average rate slightly above the national average of $600. This disparity can be attributed, in part, to the high fuel costs prevalent in the Golden State.
A comparison of current gas prices between the Gulf Coast and the West Coast illuminates this contrast. According to the U.S. Energy Information Administration (EIA), the Gulf Coast region experiences lower gasoline prices due to its proximity to major refineries and robust infrastructure, facilitating efficient supply chains; the annual average for gas in 2022 was only $3.50 per gallon. Conversely, the West Coast, including California, faces higher gas prices due to stricter environmental regulations, transportation costs, and regional supply dynamics; in 2022, the average fuel price was $4.95 per gallon. These divergent price trends contribute significantly to the disparity in mileage reimbursement rates, making California a noteworthy exception to the national average.
How companies can reimburse employees for work mileage in California
Reimbursing employees for work mileage in California can be a complex endeavor. The simplest method to meet this requirement is using the IRS mileage rate, multiplying the employee’s monthly business mileage by the Cents per Mile rate, and paying the resulting amount. So long as the payment does not exceed the IRS rate, it qualifies as reimbursement and remains tax-free; this encompasses a broad spectrum of expenditures, extending to the costs associated with using one’s privately-owned vehicle for work-related excursions.
Employers can fulfill their reimbursement obligation by offering a car allowance, a fuel card, or a combination of both, depending on factors such as their industry, the conditions of the market, and feasibility within the context of specific organizations. To avoid unlawful compensation or non-competitive salaries, employers may need to consider more robust reimbursement methods to ensure adequate coverage of costs.
In that regard, reimbursement programs save time and money for both drivers and companies. Providers like Cardata have taken many steps forward, offering a wide range of programs, including FAVR, TFCA, and CPM, which are purposefully designed to address the exact needs of drivers, even in areas with unique relationships to tax and labor laws. Unlike lump-sum methods that exclusively focus on mileage, a FAVR program combines fixed and variable costs, considering region-specific costs, like California’s higher-than-average gas prices.
California mileage reimbursement FAQs
Q: Why is mileage reimbursement necessary for employees in California?
A: Whether employees travel by car, plane, or train, the state of California considers that employees are due reimbursement for their work travel.
Q: What constitutes work-related mileage?
A: Common forms of work-related travel include driving to the bank for business purposes, commuting to buy supplies from retailers, meeting with clients, and running a wide range of errands, so long as they are integral to one’s business.
Q: How can employers ensure compliance with California mileage reimbursement laws? A: Employers should aim to reimburse employees for costs as accurately as possible. Employers can implement robust reimbursement programs like FAVR, that consider local driving data in rate-design. These programs have robust accuracy standards, and may assist with legal compliance.
Q: What are the benefits of offering mileage reimbursement?
A: Offering reasonable mileage reimbursement not only ensures compliance with laws but also brings several benefits:
- Increased employee satisfaction and productivity
- Attraction and retention of highly-qualified candidates
Q: How do mileage reimbursement programs protect workers and companies?
A: These programs streamline the processes needed to maintain compliance with the laws, which helps protect employees from being shortchanged and employers from facing legal hiccups.
Q: Are there tools available to assist with mileage optimization?
A: Yes, tools like Cardata Mobile offer things like mileage tracking, and Cardata Cloud, which offers business intelligence reports related to driving programs. This can result in savings for companies and employees, through tax efficiency and fairness.
California is undoubtedly very friendly to its vast network of employees. By navigating California’s complex labor laws and embracing the nuances of mileage reimbursement, businesses can cultivate a compliant and equitable work environment while safeguarding their interests and earnings. Reimbursement programs are a win for everyone.
Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants or agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.