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Designing, implementing and managing a mileage reimbursement program for your company can be difficult, and many businesses make the same initial mistakes.
Relying on manual mileage and expenses tracking, for example. Or settling on a tool that doesn’t provide enough accountability or meet your company’s needs. Or not understanding mileage reimbursement rules when designing your program.
So, how can you avoid making these common mistakes with your company mileage reimbursement program?
First, you’ll need to understand what the mileage reimbursement rules are.
Then, you can dive into the benefits of offering an employee mileage reimbursement program, how to calculate mileage reimbursement rates for employees and more.
Keep reading and we’ll walk you through what you need to know, step-by-step.
[.toc-bg][.toc-heading]Jump to the section you need:[.toc-heading][.toc-div][.toc-div][.toc-flex][.toc-list][.toc-number]1.[.toc-number]What is mileage reimbursement? [.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]2.[.toc-number]What are the rules for mileage reimbursement for companies?[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]3.[.toc-number]Current IRS mileage rates[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]4.[.toc-number]Do I need to use the IRS standard mileage rate?[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]5.[.toc-number]How often do I need to update my company's mileage reimbursement rate?[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]6.[.toc-number]Benefits of offering mileage reimbursement[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]7.[.toc-number]How to calculate mileage reimbursement for employees[.toc-list][.toc-flex][.toc-flex][.toc-list][.toc-number]8.[.toc-number]FAQ[.toc-list][.toc-flex][.toc-bg]
First, what is mileage reimbursement?
Mileage reimbursement is a form of compensation employers may offer employees to offset the expenses associated with driving for the business. It is typically provided when employees drive their personal vehicles for business purposes, as opposed to using a company car or company-owned vehicle.
Mileage reimbursement is intended to cover a variety of expenses associated with owning and driving a car, such as:
There are two main types of mileage reimbursement programs: CPM (Cent Per Mile) programs and FAVR (Fixed and Variable Rate) program. When a monthly car allowance or flat stipend is set based on an estimate of how many miles an employee drives, it can be considered a form of mileage reimbursement as well.
However, it’s important to understand the IRS mileage reimbursement rules and legal obligations for your company before designing and implementing a mileage reimbursement program for your employees.
When it comes to mileage reimbursement rules, they are pretty simple:
[.866][.blue-line]In most cases, mileage reimbursement is not required by law, except in certain states.[.blue-line][.866]
But it is best practice to do so for a number of reasons that we’ll get into below.
First however, there are some legal considerations to keep in mind when considering your company mileage reimbursement policy.
While mileage reimbursement is not required federally, all companies are required to reimburse employees for work-related expenses.
If your company fails to reimburse employees for work-related expenses to the point that it causes the employee’s net pay to drop below the federal minimum wage, your company could end up in hot water.
Secondly, there are tax laws to keep in mind as well. Mileage reimbursement with an IRS-compliant program is considered tax-free income to both the employee and the employer. However, if you reimburse employees for mileage beyond the true expenses of work-related driving, this money could be considered compensation and thus be subject to taxes.
As a result, when determining your company's mileage rates for employee reimbursement, it’s important to provide adequate reimbursement to employees to cover work-related expenses without overcompensating them and incurring taxable expenses.
Several states—including California, Illinois and Massachusetts—require businesses to pay employees for work-related mileage. It’s important to check your state’s labor laws before making any decisions about a company mileage reimbursement program to ensure you’re following state guidelines.
How should you decide how much to reimburse employees for mileage? We’ll discuss this question below.
Remember: Everlance cannot provide legal advice for your company—this is for informational purposes only. If you have specific questions about your company’s legal obligations, we recommend you consult a legal professional.
Each year, the IRS sets a standard mileage reimbursement rate so that employees, contractors and employers can easily determine mileage reimbursement and expenses for tax purposes.
This rate fluctuates from year to year and applies to cars, trucks and vans.
The IRS sets this rate for two reasons:
In 2023, the IRS standard mileage rates are:
Many businesses structure their reimbursement policies around the IRS standard mileage reimbursement rate. It provides a reasonable reimbursement for employees and ensures that both employees and employers do not have to pay taxes on this reimbursement.
Does this mean you should use the IRS rate? Not necessarily. Let's discuss that next.
The short answer is, many companies do, and it may be a good fit for your business as well. However, the IRS standard mileage rate is simply a recommendation based on nationwide averages.
If your business operates in a part of the country where gas and tolls are more expensive, you may want to increase your reimbursement rate. However, keep in mind that if you choose to use a rate that exceeds the IRS standard rate, the excess income would be taxable for the employee.
Alternatively, if your business operates in an area of the country that’s less costly than average, you might consider lowering your reimbursement rate.
There is no "rule" for how often you must update your mileage rate. However, we recommend you update it at least annually, if not more often. That's because the cost per mile of driving tends to change over time.
The IRS sets a new standard mileage rate every year to reflect how the costs to own and operate a vehicle change from year-to-year. With rising gas prices and increased costs of car maintenance, updating your reimbursement rate to match the new IRS rates is a great benefit to attract and retain employees.
Even if you don't update your company's reimbursement rate to match the IRS mileage rate exactly, you may want to reflect the relative change in the rate. For example, if the IRS increases the mileage rate by two cents, it may be a good idea to increase your company's reimbursement rate by one or two cents to help offset their costs.
Remember that reimbursing employees for mileage for any amount up to the IRS standard rate is tax-free for both you and your employees. That means if the IRS increases the standard rate, you can increase your reimbursement rate and boost benefits for employees without increasing taxable income. When the standard rate was increased from 58.5 cents to 62.5 cents in mid-2022, many companies took advantage and increased their own rates to help with employee retention.
[.split-text-wrap][.text-wrap][.text-wrap-paragraph]This mid-year increase was an unusual, but not unprecedented move. The IRS cited "increasing fuel costs" and a "number of unusual factors" in their decision to update the standard reimbursement rate partway through the year.[.text-wrap-paragraph][.text-wrap-paragraph]Accordingly, you might want to consider updating your own rate semi-annually too. Or following the IRS' example and making changes whenever they release a new mileage rate.[.text-wrap-paragraph][.text-wrap][.mixed-font-a][.is-green-bold]2011[.is-green-bold][.is-info]Last time the IRS updated the standard mileage rate mid-year[.is-info][.mixed-font-a][.split-text-wrap]Given how quickly costs can change, you may even want to consider a FAVR program instead of paying a set rate per mile. A FAVR, or Fixed and Variable Rate program pays employees a fixed amount every month, plus a cent per mile rate that changes every month to reflect the latest gas prices.
FAVR programs also give you more control over your reimbursement spend and can save your company money depending on how many miles employees drive. Everlance can help you see if a FAVR program is right for your team and guide you through implementing a FAVR program easily and hassle-free.
Unless mileage reimbursement is required by law in your state, you may be wondering why you should bother reimbursing employees for mileage at all.
Well, there’s more than a few reasons.
Employees who use their personal vehicles for work will greatly appreciate not having to dig into their own pockets for the costly expenses that come with it. Especially because through 2025, employees are not able to deduct these expenses from their income taxes either. The Tax Cuts and Jobs Act, which took effect in 2018, eliminated most miscellaneous itemized deductions for individuals, including "deductions for employee business expenses."
Also keep in mind that if your employees are paid minimum wage, or close to it, and use their own car for business purposes, their travel expenses may decrease their earnings below the minimum wage. In this case, the employer is federally required to make up the difference.
In short: there’s a lot of good reasons to implement an employee mileage reimbursement program, and hardly any reason not to, especially with user-friendly technology helping to keep admin work to a minimum.
In order to calculate mileage reimbursement for employees, you need to know how many miles they drove. Whether you have a Cent Per Mile program, FAVR program, or car allowance, requiring employees to track their mileage is the first step.
It’s also essential that employees who wish to be reimbursed for mileage track their mileage carefully and keep accurate records of the distances driven for business purposes to meet IRS compliance requirements.
There are essentially two ways you can track and calculate mileage reimbursements: manually or digitally.
The manual method involves a manual log that employees fill out each time they drive their car for work-related purposes, by recording their odometer readings at the end of each trip and/or mapping their mileage on Google Maps. Employees can then submit their mileage log to administrative staff, who can calculate the amount owed based on the set reimbursement rate.
However, this process can quickly become tedious for both drivers and admin staff. Many employees may end up estimating their mileage at the end of the day rather than tracking mileage as they go, and over- or under-estimate their mileage. Or simply forget to track and submit their mileage altogether, so you have to chase them down for their logs in order to reimburse them.
As a result, it’s a much better idea to use a digital solution, like a mileage tracker app, to ensure mileage is recorded automatically and accurately. Not only does it save your employees the time and hassle by automatically recording their trips, but it also ensures accuracy. Everlance uses GPS tracking to determine exact mileage, so your company can fairly reimburse employees without overpaying or having to manually verify mileage logs.
When it comes to processing reimbursements, a digital solution can also automatically apply your set reimbursement rate to the number of miles submitted to calculate each employee's reimbursement. More sophisticated platforms, like Everlance's, can directly reimburse your employees too. The automation saves time on the administrative end and typically means employees can get reimbursed sooner.
Finally, using a car mileage tracker that is IRS-compliant will give you peace of mind that mileage and expense records are being kept safe, organized, and accurate, eliminating human error and protecting you in case of an audit.
Employers are not required to reimburse employees for mileage unless the mileage expenses cause their wages to drop below the federal minimum wage. However, many businesses reimburse employees for mileage if they're regularly using the personal vehicle for work.
At the federal level, there are not many hard-and-fast mileage reimbursement rules for employers. When reimbursing employees for mileage, you can use mileage tracking software to pay your employees at the rate you choose, whether that be the IRS standard rate or another rate. Payment can be made to employees every two weeks, once a month or once every few months.
Whatever you decide, determine a reimbursement rate, have your employees submit their mileage, and then use that mileage to calculate how much to reimburse them. You can reimburse them through your existing payroll software, or through another method if you prefer.
Businesses are not federally required to reimburse employees for business mileage. However, for businesses and employees in California, Illinois and Massachusetts, there are state laws that require employers to reimburse employees for mileage.
While some companies choose to adapt the rate at which they reimburse their employees according to driving costs in their area, many also choose to use the standard mileage rate established by the IRS. The decision depends on a variety of factors, including where companies are located, how many drivers they have and industry hiring dynamics.
Among our customers, we typically see companies reimbursing at the standard mileage rate, a slightly lower rate or using a FAVR program.
No, a standard commute from an employee’s home to a company office and back is not considered business mileage and therefore not reimbursable.
However, if part of this trip is for a business purpose, that portion of the trip can be reimbursed. For example, if an employee leaves the office, drives to meet a client on his way home, and then continues on from the client meeting to his home, the portion of the trip from the office to the client meeting location is considered business mileage.
Check out our article on 5 Things Companies Need to Know about Commuting Mileage for more details.
Check out our vehicle program guidebooks for businesses now, and get answers to all your questions about vehicle programs and reimbursements.
We help people save time and money. At Everlance, we're on a mission to empower mobile workers and businesses. That sometimes leads us to generalize tax information. Everlance team members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.
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