The Internal Revenue Service just announced the standard mileage rate for 2022.
The standard mileage rate is a big deal for gig economy contractors who use their cars. Delivery drivers for Doordash, Uber Eats, Grubhub, Instacart and others, and rideshare drivers with Uber, Lyft and others often put thousands of miles on their cars as part of their business.
The IRS announced that beginning January 1, 2022, the standard mileage rate for the use of a car will be 58.5 cents per mile. That is up about 4.5% from the 2021 rate of 56 cents per mile.
What is the standard mileage rate?
The standard mileage allowance is an option the IRS created to simplify calculating the cost of using your car when operating a business.
As an independent contractor, who is taxed as though you were operating a business, you can deduct the cost of operating your businesses from your taxable income. For those of us who use our cars for our business, our car is our biggest expense.
Normally you would have to add up all the different costs related to your vehicle such as:
- Oil and maintenance
- Taxes and fees
In addition to keeping track of all those expenses, you can claim only the business percent of those costs. In other words, if 80% of your driving was for business, you could only claim 80% of the expenses.
Tracking all of that can get quite complicated. In order to simplify things, the IRS introduced the option of claiming a flat per-mile deduction. For every mile you drive in 2022, you can claim 58.5¢ as an expense. In 2021, you could claim $0.56 per mile.
The standard mileage rate is an option that allows you to claim car expenses based on how many miles you drive instead of tracking all those other expenses.
Is this a standard mileage reimbursement rate?
No. Not for tax purposes. This is a very common misunderstanding
The US government does not reimburse you for your miles. Taxes for 2022 will not be reduced by the 58.5¢ per mile.
This is often called the mileage reimbursement rate because it can be used as a guide if you are getting reimbursement for the use of your car. This typically happens if you are an employee.
Employers are not necessarily required to use this rate. However, it's often used as a universal number put out by the United States government.
Some gig economy platforms may use miles driven as part of their formula for payment. However, this is not the same thing as reimbursement.
In the same way, you are not reimbursed on your taxes for the miles you drive.
The difference between standard mileage reimbursement and standard mileage allowance
For independent contractors, the standard mileage rate is an allowance, not a reimbursement.
Every business mile you drive in 2022 allows you to deduct 58.5 cents from your 2022 taxable income.
Here's an example:
Let's say you drive 10,000 miles and you receive $10,000 in business income in 2022.
If this were a reimbursement, the government would give you $5,850 extra, on top of the $10,000 that you made.
I can promise that's not happening.
Here's the thing to remember as an independent contractor: The government is treating you like a business when you file your taxes. As a business, you pay taxes based on your profit, not on the gross amount of money you receive from Doordash, Uber, Uber Eats, Lyft, Instacart, Grubhub and others.
What the government means when they call this a standard mileage allowance is they are allowing you to claim 58.5 cents per mile as an expense for your business.
So, in our example above, you would have $10,000 in business income. Then you could claim $5,850 as an expense. If that were your only expense, your business would have a $4,150 profit. Your taxes are based on that $4,150 profit rather than the $10,000 that you brought in.
The difference between standard mileage allowance and standard mileage deduction.
Another common mistake is to call this a mileage deduction. I'm sure I've done that a lot myself, even on this site.
Technically, as an independent contractor, this is not a tax deduction. It's a business expense. We often call it a deduction because it works in much the same way. However, there is a difference.
That's because on your income taxes, tax deductions and business expenses are different things.
When you are figuring out your taxes, there are certain deductions that can lower your taxable income. Examples are charitable donations and mortgage interest. You can choose to add up all the deductions, or claim the standard deduction.
This isn't just nitpicking over terms. It's important to understand why it's an expense and not a deduction.
If you look at this as a tax deduction, you cannot claim it if you take the standard deduction. In fact, as of 2018, the IRS stopped allowing you to take mileage as an itemized deduction. In other words, if it's a tax deduction claiming those miles doesn't help you.
However, as a mileage allowance, where you claim the miles as a business expense, you can claim those miles. You claim your miles on a form called Schedule C.
As I said earlier, it works the same way as a deduction, as it lowers your taxable income. But when you understand that your miles driven for gig economy apps are expenses instead of deductions, you now can claim those miles and actually reduce your taxable income. You cannot do that if you take it as a deduction.
How did the IRS determine the standard mileage allowance for 2022?
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile.Internal Revenue Service 2022 Standard Mileage Rate announcement
The standard mileage rate is based on what the IRS identifies as the typical cost per mile to operate your car.
The IRS does not tell us specifically how they came up with that number.
This does not mean that it actually costs you 58.5 cents per mile to operate your car. For many of us, it can cost quite a bit less.
For those of us who drive quite a bit more than the average 12,000 to 14,000 miles a year or so, the actual cost per mile is quite a bit low because of the lower per-mile cost on fixed items (cost of ownership, insurance, registration etc).
It seems like the IRS is assuming a newer car is being used. The cost of depreciation, insurance, and registration tend to be quite a bit higher than on older vehicles.
The idea here was to come up with a universal number that at least came close to the actual cost for a large enough number of taxpayers.
What if it costs more than 58.5 cents a gallon to operate my car?
Remember that the standard mileage allowance is an option.
If your actual costs are higher than that, you can claim that higher cost. At that point you're not dealing with a per mile rate. Instead you are adding up the actual costs, and then calculating the business percent of the use of your car.
Why only 2.5 cents per gallon more?
It sure seems like our cost of operation and ownership went up a lot more than just the 2.5 cent increase.
In November 2020, the average price of gas was $2.20. In 2021 it was $3.49. That's a 58% increase, compared to a 4.5% increase that the IRS is allowing.
Keep in mind that gas is a small part of the overall cost. Based on 25 miles per gallon, the average cost per mile in November 2020 was 8.8 cents a gallon. In 2021 it was 13.9¢/gal. While a large percentage increase, it's still only 5.1 cents per mile.
Granted, even the 5 cents per mile increase is more than the 2.5 cent increase the IRS is giving us. Many of the other costs are also going up. I think you could have made a case for a steeper increase than what the IRS is giving us.
Having said that, you could also have made a strong case for the IRS dropping the per mileage rate more than 2 cents when they went from 58 cents in 2019 to 56 in 2020.
Ultimately we'll never get a good answer as to why the rate wasn't increased more.
So what do we do with this new standard mileage allowance?
The most important thing here is, track your miles.
You can claim any miles that were necessary and ordinary for the operation of your business. However, the IRS requires a record of those miles.
Either keep a handwritten record of your miles, or use a GPS app like Hurdlr or TripLog. Your mileage record needs to track the date, the number of miles driven, the business purpose and where you went.
Do not avoid tracking because you think you can't claim your miles if you take a standard deduction. We already discussed this above.
If you're in the 10% tax bracket, every mile you track will reduce your taxes by 14.8¢. That doesn't seem like much. But take that times 10,000 miles, and now you've legally lowered your tax bill by $1,480.
You can learn more about miles and taxes as an independent contractor in other articles that are part of our tax guide. There we have articles that go into more detail about how to track miles, what miles you can track, and actual expenses verses using the standard mileage allowance.