Employees who use their personal vehicles to fulfill their job responsibilities – deliver goods, visit clients, etc. – might expect their employers to reimburse them for travel-related costs. Fulfilling this expectation could mean the difference between retaining valued team members or losing them to competitors with mileage reimbursement programs. It’s also vital to maintaining compliance in states that require employee mileage reimbursement.
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What is mileage reimbursement?
Mileage reimbursement means an employer covers certain costs incurred when an employee uses a personal vehicle for business purposes. Eligible miles driven are tracked and then multiplied against a reimbursement rate.
What does mileage reimbursement cover?
Employers who offer mileage reimbursement may cover vehicle expenses related to the following:
- Insurance premiums
- Registration fees
- Fuel costs
- Regular maintenance (oil changes, tune-ups, etc.)
- Wear and tear (brakes, tires, etc.)
This coverage only applies to job-specific use of a personal vehicle, such as traveling from one work site to another or from the employer’s premises to a client’s location. The daily commute from an employee’s residence to a place of business is not eligible for mileage reimbursement.
Standard mileage reimbursement rate
The Internal Revenue Service (IRS) extends tax deductions to people who use their vehicles for business purposes. As such, they issue a standard rate, which employers can use to calculate mileage reimbursement for employees.
Are mileage reimbursements taxable?
Standard rates set by the IRS only specify the maximum rate at which businesses can reimburse employees for mileage tax-free. Flat car allowances and custom rates that exceed the standard rate may result in taxation because the IRS treats the added reimbursement as compensation.
Recent mileage rates per year
The federal government regularly adjusts its standard rates for inflation, which it announces in mid to late December for the coming year. Employers may find the following reference table helpful for mileage reimbursement:
| Period | Business use (cents per mile) |
|---|---|
| 2024 | 67 |
| 2023 | 65.5 |
| 7/1/2022 - 12/31/2022 | 62.5 |
| 1/1/2022 - 6/30/2022 | 58.5 |
| 2021 | 56 |
| 2020 | 57.5 |
See the latest IRS standard mileage rates
What is a fixed and variable rate (FAVR)?
The standard rate issued by the IRS is a type of FAVR, which means it accounts for both fixed and variable costs in vehicle usage. Examples of fixed costs are insurance premiums and registration fees. Variable costs include fuel and maintenance.
How to calculate mileage reimbursement
Calculating mileage reimbursement is as simple as multiplying the standard rate by the total business miles accumulated.
For example, an employee travels 560 miles in a personal vehicle for work-related purposes throughout February 2024. The mileage reimbursement calculation for the month is as follows:
560 miles x 0.67 (cents per mile) = $375.20
Using a custom mileage reimbursement rate
Employers are not required to use the IRS standard rates when calculating mileage reimbursement. They can create their own rates, though there may be tax implications (more on this later). Two alternatives to the standard rate include:
- Custom FAVR
Employers pay a specific sum to cover car insurance and other fixed expenses and use a cents per-mile rate for fuel and vehicle maintenance, i.e., variable costs. - Flat reimbursement
Employees are given a monthly allowance to cover all their work-related vehicle expenses, regardless of the mileage accumulated during that time. This type of reimbursement is usually taxed.
How does mileage reimbursement work?
Employee reimbursements for work-related use of personal vehicles are tax-deductible expenses for employers. It’s also tax-free for employees as long as the IRS standard rates are applied. If employers use a custom rate that exceeds the standard rate, the additional reimbursement is considered compensation and subject to income tax and payroll taxes. Flat reimbursements are also treated as taxable income.
Mileage reimbursement laws
The federal government does not require mileage reimbursement – with one exception. If the cost of using a personal vehicle for work-related purposes reduces an employee’s earnings below minimum wage, employers must reimburse the difference.
A few states – California, Illinois and Massachusetts – have mileage reimbursement requirements that apply to employees using their personal vehicles for work. Employers should check with their state authorities for the latest information.
How to manage a mileage reimbursement policy
Having employee mileage reimbursement rules helps ensure everyone is treated fairly and minimizes risk. Here are some tips for creating and managing such a policy:
- Don’t overlook location
Vehicle expenses vary by geographic region. Employers using custom mileage reimbursement rates should consider the price of insurance, fuel, maintenance, etc., in their area. - Track mileage correctly
To keep reimbursement costs manageable, employers must ensure that the mileage incurred was necessary for business purposes. Various tracking methods exist for this purpose, including GPS and mobile apps. - Clearly communicate the policy
Employees should understand which types of vehicle usage are eligible for mileage reimbursement. It may help to provide specific examples, e.g., traveling to a client vs. traveling home.
Effective mileage tracking options
Mileage can be tracked by writing down the odometer reading before and after an eligible trip. However, it’s not uncommon for employees to round to the nearest mile, which can increase an employer’s reimbursement costs. Automated tracking through GPS or a mobile app is a much more accurate alternative. It’s also easier for employees because they don’t have to remember to check their odometer.
Integrations with payroll and time-tracking solutions
Employers may be able to manage mileage reimbursement through their payroll or time and attendance software. For example, ADP’s payroll solutions are compatible with some expense and mileage-tracking applications. The software will automatically upload mileage logs directly to an employee’s paycheck, saving time and improving accuracy.
Frequently asked questions about mileage reimbursement
Do organizations have to use the IRS mileage rate?
Employers do not have to rely solely on the standard mileage rates established by the IRS. They can create their own FAVR or reimburse mileage via a flat sum, though they must still comply with the applicable tax guidelines.
Is mileage reimbursement required by law?
Some states require employers to reimburse mileage. The federal government does not have such laws. However, employers must reimburse employees if the cost of using a personal vehicle for work-related purposes causes their earnings to fall below minimum wage.
Why should my company have a mileage reimbursement policy?
Reimbursing employees for business mileage expenses can be an effective recruitment and retention tactic, particularly with jobs that require frequent travel. In a competitive market, employers might exceed the standard reimbursement rate to incentivize candidates and employees further.
How do I determine the reimbursement rate for my company?
The IRS publishes the standard rates on its website. If creating their own mileage reimbursement rate, employers should investigate the vehicle-related expenses in their geographic area, such as insurance premiums, registration fees, fuel prices, etc. Doing so can help ensure that employees are adequately reimbursed.
What documentation should I require from employees for mileage reimbursement?
Employers using the IRS standard rate will need their employees to provide mileage logs. They might also ask for insurance statements, fuel receipts and maintenance records if they use custom reimbursement rates or flat car allowances.
Should I provide a company vehicle instead of reimbursing employees for using their cars?
Employers should conduct a cost-benefit analysis of mileage reimbursement vs. company cars. On the one hand, employers have more control over maintenance with company vehicles, and they could help attract talent. On the other hand, employers may have to insure employees under their auto policy, and there may be tax implications if employees use company cars for personal travel. Employees may also want their choice of vehicle, which could further increase costs.
How can I ensure fairness and consistency in mileage reimbursement across my workforce?
Creating an official mileage reimbursement policy helps ensure that employees are reimbursed consistently and fairly. The policy should document the reimbursement rate and clearly explain the business travel circumstances that qualify for reimbursement.
This guide is intended to be used as a starting point in analyzing mileage compensation and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax guidance or other professional services. Please consult with your legal counsel.
