Working on your taxes? Navigating tax liability can be complex, and it's common for drivers to question why their reimbursements might be taxed as income despite participating in a FAVR reimbursement program, which is attractive for making reimbursements tax-free. This guide will address common queries and provide insights into determining and reporting tax liability.
Why is a portion of my reimbursements considered taxable income at the end of the year?
While FAVR programs are designed to get drivers tax-free reimbursements, there are scenarios where a portion of them may be taxable. It's essential to understand these situations to better manage your financial obligations.
There are three main reasons for taxable income at the end of the year:
- Non-compliance with driver's license or insurance requirements for longer than 30 days (the reimbursement for the months the driver was not compliant is subject to taxability).
- Falling below the minimum 5k miles per year the IRS requires drivers to apply for a FAVR program (drivers on these cases will also be reassigned to a standard CPM program).
- Non-compliance with your program's vehicle's age or MSRP (this is the most common reason).
How does Everlance determine what my tax liability is?
Everlance calculates your tax liability by performing the "Safe Harbor" test. The Safe Harbor test consists of multiplying your annual mileage by the IRS standard mileage rate (67.0 cents per mile driven for 2024), which acts as your taxable shield, then subtracting the result from what you actually got reimbursed for the year.
If you got less than what you might've gotten if you were reimbursed using the IRS standard rate, then your mileage reimbursement for the year is not taxable at all. But, if there's a surplus and you got reimbursed more than you would've with the IRS standard rate, that surplus is considered income and must be declared.
If you got less than what you might've gotten if you were reimbursed using the IRS standard rate, then your mileage reimbursement for the year is not taxable at all. But, if there's a surplus and you got reimbursed more than you would've with the IRS standard rate, that surplus is considered income and must be declared.
Example:
- A sales representative with a 2014 vehicle drove 12.000 miles in 2023 under a FAVR program and was reimbursed $8,040.
- The company established a Vehicle Compliance rule, that all drivers on the sale representative FAVR program must drive a 2018 or newer vehicle.
- The sales representative is not compliant with his vehicle, making their mileage reimbursements subject to the Safe Harbor test.
- If the sales representative were under a CPM (cent per mile) program with the IRS standard rate, he would've gotten $7,860 (12.000 miles x 0.655).
- What he received ($8,040) minus what he would've received with the IRS rate ($7,860) = $180.00.
- Those $180 should be declared and taxed as income.
How is my taxable income reported to the IRS?
The portion of your reimbursement that is taxable should be added to your W-2 statement as ordinary income. For additional details, please reach out to your company's payroll department.
How do I know how much I will be taxed?
While Everlance cannot provide specific tax advice, we can provide you with the total amount that will be subject to taxation. It's important to note that the exact amount you will be taxed is unique to each individual and their specific income and sources. For personalized guidance based on your circumstances, we recommend consulting with a tax professional or reaching out to your company's payroll department.
Customer Support:
If you need to contact support or have questions, please check out our help center at help.everlance.com or reach out at support@everlance.com or by phone at (872) 814-6308 (USA) or (877)704-2687 (CAN). Our office hours are 9am-5pm EST Monday - Friday and 9am-1pm EST on weekends.
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