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Reimbursing Employees for Mileage

Posted by Lance Wilkins Posted on Mar 23 2019

What could go wrong? She added mileage reimbursement to her employee’s paycheck. No need to write an extra check. Why was it costing her hidden fees and why was the employee upset?

It didn’t happen exactly that way, but close. Actually, working with a client, we discovered her mileage reimbursements were being reported as wages. Subject to withholding, social security, medicare, and more. It’s actually easy to do. Here’s how to prevent that.

To reimburse an employee for mileage, I can easily add the amount to a paycheck. It’s easier and faster if done right.

The first step is to setup a payroll item. From Lists->Payroll Item List, choose the Payroll Item button, then select New.

I always choose the Custom Setup in the first window. There just isn’t enough flexibility in EZ Setup.

Once we make this selection and click Next, the following window appears.

This is an Addition, right? We are adding an amount to an employee’s paycheck.

In the next step we need to name the payroll item we’re creating. Mileage Reimbursement seems like a good name. 

Following that, we’ll need to tell QuickBooks what expense account should be used when this item is added to a paycheck and QuickBooks needs to post the dollars to a specific expense account. I like to create an expense account called Mileage Reimbursement. If you like, you can make it a subaccount of Automobile Expense. See the screenshot below.

The next window is of great importance.

Tax tracking type is always the most important decision when setting up any payroll item. The selection in this window determines whether or not the amounts will be taxed, how the amounts will appear on payroll tax forms, and on W2s. It’s important.

The default when creating an Addition type item, which we are doing here, is Compensation. Compensation is taxable wages. We definitely do not want that. This is a reimbursement to an employee for miles driven for the company, it’s not taxable wages.

Change the Tax tracking type selection to None.

A few windows follow, allowing for additional information. There’s one for Taxes. I’ve never seen an instance where something needed to be changed in this window. If the tax tracking is correct, the Taxes window should already be correct without any input from us.

Our payroll item IS based on quantity, not on hours. So, make that selection. It will be based on the number of miles driven.

It is added to Net Pay, not Gross Pay.

Default rate and limit. Usually the default rate will be the current federal mileage rate. As of this writing, that’s .58 per mile.

There’s no limit, so we’ll leave that blank.

Click Finish and that’s it. Add this to an employee’s paycheck at the time of paycheck creation. Enter the number of miles and QuickBooks will do the rest.

 

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