Many companies use the IRS's published standard mileage rates for mileage reimbursement. However, the question of whether to pay that exact rate to employees is actually somewhat complicated, especially with the significant increase in gas prices in 2026.
Quick Answer
Yes, paying less than the IRS standard mileage rate (72.5 cents per mile for 2026) is legal in every state, and reimbursements stay 100% tax-free as long as you pay at or below that rate and keep accurate mileage records. The real question isn't whether you can pay less, it's whether you should, given your state's labor laws, your employees' actual driving costs, and your risk of under-reimbursement lawsuits.
This guide breaks down exactly when paying less makes sense, when it backfires, and what HR, Finance, and Sales Ops leaders should check before changing a mileage policy
Yes. Reimbursing at the IRS standard mileage rate has never been mandatory; it's a "safe harbor", not a legal floor. The IRS created the rate so employers and individuals would have a simple, audit-proof way to calculate the tax-free portion of a vehicle reimbursement. Employers are free to pay more, less, or exactly that amount.
What changes is the tax treatment and, in some states, your legal exposure:
Employers typically cut below the federal rate for one of two reasons:
1. Cost control. At 72.5 cents per mile, a sales team driving 20,000 miles a year collectively costs $14,500 per person, before any other vehicle program admin. Trimming a few cents per mile adds up fast across a large mobile workforce.
2. The national rate doesn't reflect local costs. The IRS rate is a blended national average. It bakes in insurance, fuel, depreciation, and maintenance costs averaged across the entire country, which means it's calibrated for nowhere in particular. A company based in a lower-cost region may reasonably conclude that the full rate overpays its team.
3. The rate can lag real-time fuel costs. The IRS sets its annual rate using the prior year's cost data, so it doesn't adjust mid-year when gas prices move sharply. That lag cuts both ways: after a Middle East-driven supply shock in 2026, the national average gas price climbed roughly 28% year-over-year, pushing real fuel costs in many states well past the 72.5-cent rate calibrated to cover. A company that locked in a lower customer rate earlier in the year may now be under-reimbursing drivers in high-price states like California, Washington, or Hawaii, even if that rate looked reasonable when it was set.
All three reasons are legitimate. The risk is how companies act on them, usually by applying a single, company-wide rate, which exacerbates the same accuracy problem in the opposite direction, especially when fuel costs are moving as fast as they have in 2026.
California Labor Code Section 2802 requires employers to reimburse employees for "necessary expenditures" incurred while performing their jobs, including vehicle costs. Courts have generally treated the IRS rate as sufficient to satisfy that requirement, which means paying meaningfully less in California (and in similarly structured states like Massachusetts and Illinois creates real legal exposure, including individual or class action claims.
If your mobile workforce touches any of these states, a uniform "pay less than IRS" policy is one of the riskier cost-cutting moves you can make.
A flat rate, IRS, or custom assumes that 72.5 cents times average mileage roughly equals average vehicle cost. That assumption breaks down fast:
An employee driving 2,000 miles a month in a low-cost region may be significantly over-reimbursed.
An employee driving 1,000 miles a month in a high-cost-of-living region (think Los Angeles or Boston, with high insurance and gas prices) may fall well short of their actual costs.
Cutting the rate further to control spending widens this gap. You end up under-reimbursing your most expensive-to-operate-in markets while still over-paying everyone else.
Lowering the per-mile rate to control costs is a common instinct — but if mileage is self-reported, some employees respond by padding their logs to recover the difference. Automated, GPS-based mileage tracking (with a short buffer window before mileage is locked in) closes this gap and gives Finance and HR a defensible, audit-ready record regardless of the rate you ultimately choose.
If a flat rate, above, or below the IRS standard creates winners and losers, no matter where you set it, the fix isn't a better flat number. It's a reimbursement structure that doesn't rely on one number at all.
Fixed and Variable Rate (FAVR) reimbursement is an IRS-recognized alternative (Rev. Proc. 2019-46) that pays employees through two components:
Because both pieces are based on local cost data rather than a national blend, FAVR closes the over- and under-reimbursement gap that a flat rate (IRS or custom) can't avoid. It's also the structure most likely to hold up if an employee in a high-cost state challenges their reimbursement as insufficient because the payment was calculated for *their* actual costs, not a national average.
For 2026, the maximum vehicle cost the IRS allows companies to use in FAVR calculations is $61,700, up from $61,200 in 2025 worth checking against your program if you haven't updated it for the new year.
If you operate only in states without strict reimbursement laws, have a small, geographically uniform driving population, and track mileage automatically, a lower flat rate can work and may genuinely save money.
If you operate across multiple states, especially California, Massachusetts, or Illinois, or have employees with meaningfully different mileage or local costs, a flat rate, whatever the number, is exposing you to either under-reimbursement risk or unnecessary overspending. FAVR is built specifically for this situation.
Is it legal to pay employees less than the IRS mileage rate?
Yes, in every state. The IRS rate is a safe harbor for tax-free reimbursement, not a legal minimum. However, some states (notably California) have separate labor laws that require full reimbursement of necessary business expenses, which can create legal risk if your lower rate doesn't cover the actual costs.
What happens if I pay more than the IRS mileage rate?
The portion above the IRS standard mileage rate (72.5 cents per mile for 2026) is treated as taxable income to the employee and is subject to payroll tax for the employer.
What is the 2026 IRS mileage rate?
72.5 cents per mile for business use, up 2.5 cents from the 2025 rate of 70 cents, per IRS Notice 2026-10.
Is FAVR better than the IRS mileage rate?
FAVR isn't "better" in every case — it's more accurate for larger, geographically dispersed, or high-mileage workforces because it accounts for local costs. Companies with a small number of low-mileage drivers in a single region often do fine with a standard per-mile rate.
Not sure whether your current mileage rate is under-reimbursing employees in some states while overpaying in others? Schedule a free discovery call with mBurse, and we'll benchmark your program against 2026 IRS guidelines and local cost data with no obligation.