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IRS Raises Standard Mileage Rate for 2022

Effective Jan. 1, 2022, the optional standard mileage rate used in deducting the costs of operating an automobile for business purposes will be 58.5 cents per mile, the IRS announced in Notice 2022-03 on Dec. 17. Employers often use the standard mileage rate—also called the safe harbor rate—to pay tax-free reimbursements to employees who use their own vehicles for business.

Changes for 2022

For 2022, standard mileage rates for the use of cars, vans, pickups or panel trucks will be:

  • 58.5 cents per mile driven for business use, up 2.5 cents from 2021. This ties the highest safe harbor rate the IRS has ever published, which was a midyear increase in July 2008.
  • 18 cents per mile driven for medical care and for moving purposes for active-duty members of the Armed Forces, up 2 cents from the rate for 2021.
  • 14 cents per mile driven in service of charitable organizations, which remains unchanged.

For cars employees use for business, the portion of the standard mileage rate treated as depreciation will be 26 cents per mile for 2022, unchanged from 2021.

While the standard mileage rates for business, medical and moving purposes are based on annual changes in the costs of operating an automobile, the charitable rate is set by statute.

Higher Driving Costs

There were quite a few compounding trends from 2021 that affected driving costs,” said Ken Robinson, market research manager at Boston-based Motus, a mobile workforce management software firm. Among these trends, the firm noted, were:

  • Fuel prices rocketed up in 2021, representing a 32 percent year-over-year increase in the national average between October 2020 and October 2021 and the highest levels since 2014.
  • Insurance resumed its steady pace of annual increases that was disrupted in 2020, representing a 24.2 percent increase in auto insurance premiums since 2011, with accident frequency in 2021 heading toward 2019 levels.
  • Disruptions in the supply chain and constraints such as the chip shortage led to depreciation rates remaining low—70 percent lower than pre-pandemic levels—with residual values for vehicles likely remaining high.

Using FAVR Plans

The IRS rate is optimal for low-mileage drivers, such as those who travel fewer than 5,000 business miles per year, according to benefits advisors.

Alternatively, Notice 2022-03 provides maximum vehicle expenses when using a Fixed and Variable Rate (FAVR) allowance plan, in which employees who drive their own vehicles can receive tax-free reimbursements from their employers for fixed vehicle costs (such as insurance, taxes and registration fees) and variable vehicle expenses (such as fuel, tires, and routine maintenance and repairs), instead of the standard mileage rate.

Under a FAVR plan, the cost of the vehicle may not exceed a maximum amount set by the IRS each year. For 2022, vehicle costs may not exceed $56,100 for automobiles, trucks and vans, up from $51,100 in 2021.

Revenue Procedure 2019-46, which updated the rules for using standard mileage rates in computing the deductible costs of operating a car for business, stated that an employer may provide a FAVR allowance only to an employee who can provide adequate records showing at least 5,000 miles driven during the calendar year in performing services as an employee or, if greater, 80 percent of the annual business mileage of that FAVR allowance.

If the employee is covered by the FAVR allowance for less than the entire calendar year, the employer may prorate these limits on a monthly basis.

“Two years into the pandemic has showcased volatility and fluctuations across vehicle costs,” said Motus CEO Craig Powell. Business leaders, he explained, are focusing on “managing these costs in a more accurate and fair way” for workers using their own cars to conduct business, including remote workers.

Motus calculates that organizations have saved more than $1.4 billion using FAVR reimbursement compared to the IRS business mileage standard since 2011. In part that’s because the standard mileage rate doesn’t account for driving costs that fluctuate based on geography and time of year, so businesses that rely on the rate to reimburse mid- and high-mileage workers may be giving reimbursements that do not reflect actual driving costs.

According to payroll, benefits and compliance firm Justworks in New York City, an advantage of using a FAVR plan to reimburse employees is that “in locations with higher automobile operating costs, the FAVR allowance may be more than the standard mileage rate.” However, “the disadvantage is that the employer must recalculate the FAVR allowance at least once every three months,” as payments to employees must be made at least quarterly.

Flat Car Allowances

Another way for employers to reimburse employees for their business-driving expenses is a flat car allowance, which is a set amount provided to employees over a given period to cover the costs of using their own car for business purposes—such as $400 per month for the cost of fuel, wear and tear, tires, and more. Employers can also pay expenses using a variable rate for different locations.

While a car allowance is relatively easy to administer, payments are taxable to employees unless handled within an “accountable plan” that requires substantiation through adequate records and the return of excess amounts in a reasonable time.

reposted with permission from SHRM 12.2021

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