Employers are not required by federal law to reimburse mileage incurred by employees for work. But they absolutely should adopt some kind of vehicle reimbursement plan.

When Do Employers Have to Pay a Mileage Reimbursement?

Employers are only required by law to reimburse personal vehicle expenses in states with expense indemnification labor codes like California, Massachusetts, and Illinois. But this does not mean that businesses operating in other states should not follow this practice.

For starters, if an employee can demonstrate that their use of a personal vehicle on behalf of the company is reducing their pay below the minimum wage, then they can sue their employer. A federal court found in favor of a pizza delivery driver in March 2024, ruling that the employer needs to cover 100% of costs associated with operating the vehicle for deliveries. It remains to be seen whether this ruling will affect other industries.

But even more pertinent is the fact that most people will not work for a company that requires them to use a personal vehicle yet provides no mileage reimbursement or car allowance. This is especially true since 2018, when employees could no longer deduct business mileage from their taxes.

What are the best ways to reimburse mileage for business?

The most common approach to reimbursing mileage is to adopt the federal rate published by the IRS each year. For 2024, that federal rate is 67 cents per mile. Some organizations that operate in less expensive regions may pay a lesser rate. But as long as they pay that rate or less and follow proper procedures for tracking and reporting mileage, those payments are tax-free to both the employer and the employee.

Another approach that is increasing in popularity is fixed and variable rate reimbursement, also known as FAVR. This method also issues tax-free payments but uses a more complex algorithm for determining reimbursement rates and payments. This is the IRS-recommended plan for the most accurate payments, since it paints with less of a broad brush than the federal mileage reimbursement rate.

What's the best car allowance or mileage rate for 2024?

To determine the appropriate car allowance or mileage rate for your employees, it helps to get benchmarking data. Businesses that operate in the same industry and businesses that are of a similar size can both provide good indicators of what a competitive allowance or rate would be.

You also have to take into account the range of expense needs among drivers within your organization. A more localized organization may have an easier time determining this than a larger organization that operates in multiple states nationwide. 

How do you keep your mileage reimbursements tax-free?

To keep mileage reimbursements tax-free, the employer must first of all keep track of the business use of all mileage. This requires either an IRS-compliant mileage log or mileage tracking app that includes relevant information like dates, locations, purposes, and distances of trips.

Second, the employer must issue payments that do not exceed the equivalent of a mileage rate equal to the federal rate published by the IRS (67 cents per mile for 2024). This could either come through directly reimbursing mileage at that rate or less, or through paying a car mileage allowance, which caps allowance payments at the amount that would equal the IRS rate. The employer can also deliver tax-exempt payments using a FAVR allowance, as explained above.

What counts as an IRS-compliant mileage log?

An IRS-compliant mileage log should contain the following information, reported on an annual basis:

• Your total business mileage
• The total mileage accumulation for the year
• Each trip’s date, destination, and purpose

But for business reimbursement purposes, you need more frequent reporting so that management can verify business use of the mileage being reported for that pay period. This process can get tedious, especially if an organization uses manual entry into a spreadsheet like Excel or Google Sheets.

Automating the process using a mileage tracking app is best practice. Our mobile app, mLog, allows for hands-free tracking, easy swiping to categorize business vs. personal trips, and automatic entry of location using GPS. This information is then uploaded into your reimbursement system at the end of each reporting period for easy approval.