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The Internal Revenue Service issued the 2023 optional standard mileage rate used to calculate the deductible costs of operating an automobile for business in lieu of tracking actual costs. Household employers can use this rate to calculate the deductible costs of their workers operating their own automobiles while they are on the job.
Beginning on Jan. 1, 2023, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) increased to 65.5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022. In recognition of gasoline price increases, the IRS made this special adjustment for the final months of last year.
While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance, and other fixed and variable costs.
These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles.
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile.
Gas and mileage reimbursement is not taxable compensation so there is a financial advantage to using the IRS standard mileage rate. Any compensation paid above and beyond the IRS rate, however, would be considered taxable income.
Some examples of when a household employee can apply the standard mileage rate:
A nanny uses their own vehicle to drive the children in their care to a museum, park, out to lunch, or on other excursions
A senior caregiver uses their own vehicle to drive the elderly person in their care to a doctor’s appointment or to the pharmacy to get a prescription
The standard mileage rate doesn’t apply if the household worker is using their employer’s vehicle while on the job.
Learn more about how to reimburse your nanny for gas and mileage.
While federal law does not require you to reimburse your employees for mileage, in some states like California; Illinois; Massachusetts; and Washington, D.C. it is legally required to reimburse your employee for the miles they drive in their own vehicle while on the job. Even outside of those states, it is a best practice to pay your nanny for mileage based on the IRS standard rate.
Your employee’s commute to and from your home does not count toward their mileage reimbursement.
Other ways to compensate your employee for gas and mileage will likely be considered taxable income. A couple of these methods include a mileage stipend and increasing your employee’s hourly rate.
You could add a standard amount to your nanny’s paycheck each pay period to cover gas and mileage. This may work if your nanny drives the same number of miles each week as you are estimating their expenses. However, this type of stipend is taxable income for you and your employee.
Another option is to boost your nanny’s hourly rate to cover driving expenses. Again, this may seem like an easy solution, but it will cost you and your employee increased taxes on the extra pay.
It is important to note that under the Tax Cuts and Jobs Act, employees cannot claim a miscellaneous itemized deduction for unreimbursed travel expenses.
Employees always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Reposted with a permission from GTM Household (https://gtm.com/household)