The Internal Revenue Service has announced an increase in the optional standard mileage rate for the final six months of 2022. Household employers can use the optional standard mileage rates to calculate the deductible costs of their employees operating their own automobiles while they are on the job.
Continue reading for more details via our friends at GTM.
For the final six months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, an increase of four cents from the rate effective at the start of the year.
These new rates become effective July 1, 2022.
If an employee drives a car while on the job that gets 25 miles per gallon (MPG), the rate increase translates into an extra $1/gallon in reimbursable expenses.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from January 1 through June 30, 2022, household employers should use the current rate of 58.5 cents per mile.
“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices. We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.” – IRS Commissioner Chuck Rettig
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.
The optional standard mileage rate is used to compute the deductible costs of operating an automobile while on the job in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
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.
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.
Household employers also have the option of allowing their workers to calculate the actual costs of using their vehicles rather than using the standard mileage rates.
Midyear increases in the optional mileage rates are rare. The last time the IRS made such an increase was in 2011.