The S-corp can reimburse the employee expenses under an accountable plan or a non-accoutable plan. Either way, the expenses are deductible business expenses, but the rules are different.
Under an accountable plan, the business only reimburses expenses that are proved by receipts and other documentation. The reimbursements are not taxable income to the employee and are not reported on the W-2. The employee can't deduct the expense on their tax return since they were reimbursed tax-free.
The business can reimburse at the IRS standard mileage rate, which includes allowances for all car expenses (wear and tear, maintenance, gas, insurance, etc.) The proof needed then would be a mileage diary or log showing the date, business purpose of the trip, and miles driven. The business needs to see the mileage records in a timely fashion (for example, once a month). The business can provide reimbursements in advance of travel, but it must eventually see the records and reconcile the expense (the employee must pay back any excess). Also note the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
Or, the business can reimburse using the actual expense method. The business would reimburse actual expenses for gas, insurance, repairs etc. The business does not have to reimburse for every expense (you could reimburse gas and insurance and not tires and oil changes, for example) but for any expenses the business does reimburse, it must have adequate proof. Adequate proof means you need to see all the receipts for the expenses you will cover (gas, insurance, maintenance, repairs). You also need the total vehicle mileage for the year (so you can determine the # of business miles and the # of personal miles), and a log book of all the business trips. You compute the percentage of business miles driven out of the total and that is the percentage of expenses you can reimburse tax-free. You can make estimated reimbursements during the year but you have to reconcile it or "true it up" at the end of the year. (Without a complete record of all business miles and all personal miles, there is no way to prove what percent of the insurance and maintenance you should be paying.) If the employee has expenses that were not reimbursed, they can claim them as a work expense on form 2106 as an itemized deduction subject to the 2% rule.
You may not be keeping all the paperwork needed to document the expenses under an accountable plan.
If you use a non-accountable plan, then the business does not need to keep or see any car records. You can reimburse any amount you want, from below the IRS standard rate, or above the IRS standard rate, or for gas and insurance but not oil changes, or anything else you want to pay for. All the reimbursements get included in the employee's box 1 W-2 wages and are subject to income and employment tax withholding. Then, the employee is responsible for keeping their own mileage diary and expense records, and claiming either the standard mileage rate or the actual expense method on their tax return as an itemized deduction subject to the 2% rule. The S-corp doesn't need to know or care what the employee does with the money.
The non-accountable plan is less beneficial to the employee because of the 2% rule. The accountable plan is more beneficial to the employee but requires that the business obtain and keep accurate records which include a diary showing the date, time and purpose of each trip (for the standard rate method), or the diary plus all expense receipts plus the total vehicle milage for the year (for the actual expense method).
