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Mileage Reimbursement being included as Income North Carolina

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  • Mileage Reimbursement being included as Income North Carolina

    Hello,
    My mother works for a home health care agency in North Carolina. She is paid an hourly rate for the hours she works with each client and she is given a mileage reimbursement for miles she drives between clients (not to include her commuting hours from home to first stop and last stop to home). My mother had some concern that she was being taxed on this reimbursement so we went through her paycheck over the phone together. She was concerned because there used to be an asterisk next to her mileage noting it was not being taxed but it has not been there since November of 2010 since they got a new payroll person.

    The company had her gross salary listed as the amount she earned (hours worked X rate of pay) and the mileage reimbursement. I used Paycheck City's calculator and it appeared that she was being taxed on the mileage. If I put in just her hours worked and rate of pay and calculated the taxes based on her withholding amount to get her net income and then added her mileage reimbursement to that net income she was around $16 short on her paycheck. When I just took the gross salary listed as her income on her paycheck which was her total hourly earnings plus her mileage and calculated her tax liability with her withholding amount.. her tax amount was higher than the prior calculation and came out even to what her check amount was. It appears to me that she is being taxed on the reimbursement which is increasing the amount of taxes she is paying at the time and also inflating her gross income. I told her she needed to discuss this with her payroll person.

    The payroll person told her today that she was not being taxed on the reimbursement but that it was considered income.

    Am I correct in thinking that mileage reimbursement is neither taxable nor to be considered income?

    Are there resources in Eastern North Carolina that I can refer my mother to or help her with getting this resolved?

  • #2
    It would be more accurate to say that there is a real possibility that mileage is not wages. Very basically, per the Internal Revenue Code, everything of value received by the employee because of the employment relationship is fully taxable wages UNLESS the employer can show otherwise. If the "accountable plan" rules are being fully followed, then mileage can be non-taxable. If the rules are not fully followed, then mileage can indeed be taxable. IRS publication 463 discusses these issues in more detail.

    If I can make a suggestion: focus on the gross wages, not the taxes calculated. If you use a tax calculator argument, the payroll person will assume that you messed it up. As a long time payroll person myself, it happens a lot. Instead focus on the gross wages. That is the weak point in the other payroll person's argument. Put together a worksheet tying together the gross wages from each and every paystub (on aggregate) to W2 Box 1. That is your proofing point. It is not possible to argue taxes meaningfully on an aggregate basis. You basically have to go back one pay check at at time, to do your tax calculations for each check, then aggregate the results to come up with a meaningful answer. The payroll person you are arguing likely knows this. I have had employees come up with some really strange answers by trying to take aggregate numbers into an annual tax table, when that was not how the employee was paid. Federal income tax, and most states, use graduated income tax tables, which means even small changes in gross wages from pay period to pay period can cause interesting changes in tax withholding.

    One last point. W2 Box 1 is normally gross wages plus imputed income less 401k deferral less Section 125 pretax. It is not a bad idea to routinely do something like this every year just to be sure that the W2 was done correctly. Second point. If you really want to proof taxes, target FICA-MT. That is the least worst tax to work with
    "Reality is that which, when you stop believing in it, doesn't go away".
    Philip K. **** (1928-1982)

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    • #3
      Thanks for the response

      Looking over the laws and rules regarding Accountable and Non Accountable Plans.. this is in deed a case where this is an Accounted plan. My mother documents her mileage on a form they provide for each and every client and turns that in on a weekly basis.

      The payroll person stating that this was considered income is the concern. If all cases are true regarding this being an Accountable Plan then this mileage reimbursement should in no way be considered income or taxable if I understand things correctly.

      I understand the subtle changes to taxes being withheld etc but when I take my mothers hours worked (80 hours for a two week period X wage (let's say 7.35) I come up with a gross income of 588 yet her employer would have 638 (amount earned + mileage ($50)). The tax with holdings for 588 are substantially different (15 to 20 dollars each pay check) than for 638 for a single person claiming 1.

      I appreciate your advice and will have her approach the situation around her gross income.

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      • #4
        It is to the employer's advantage to support the mileage reimbursement as "not wages". If the employer is really calling this wages when they do not have to, my question would be "why". I generally have both Accounts Payable and Payroll report to me, and I always have gone out of my way to avoid taxable mileage reimbursement whenever possible. Too late in my day to remember my W2 Box codes, but a number of non-obvious things occur when one has a taxable mileage reimbursement. Easier to just follow the accountable plan rules to letter. No matter what the line managers want.

        One last point. Mistakes happen. Smart people give the other party a chance to recover their mistake. If the employer is doing mileage logs and otherwise apparently following the accountable plan rules, then something non-obvious is happening here. Could be a simple mistake, could be something exotic. Say Bob moves from work site A, B and C (in that order) but has a lot of non-work time between trips. I am not entirely sure how IRS views that (meaning the employer in question probably does not either).

        You have one other possibility. The employer does not fix things and you still feel that the employer is wrong. It is always best to get the employer to fix the mistake (if indeed there is a mistake), but in theory the taxpayer/employee when they do their 1040 could file a 4852, along with documentation supporting the taxpayer/employees version of why they think that they are right and the employer is wrong. The obvious problem is that IRS hates these types of disputes and will try to come up with a "plague on both their houses" solution if possible.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)

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