Many organizations pay a mileage rate to reimburse workers for the use of a personal vehicle. But how do you know it accounts for all reimbursable vehicle expenses? Some expenses like auto insurance and depreciation can be difficult to reimburse properly with a mileage rate.
A mileage reimbursement should cover all reasonable costs associated with using a vehicle for work. When the IRS calculates its standard business rate, a range of costs factor in. These costs include fuel, oil changes, maintenance, auto insurance, and depreciation.
A mileage rate is well suited to cover expenses that increase as mileage increases. A cents-per-mile rate increases its payout the more you drive. Expenses that increase as mileage increases include:
Expenses that remain relatively separate from mileage are a different matter. Car insurance and depreciation often combine for 60 percent of more the annual costs of owning and operating a vehicle.
The IRS factors these costs into the federal mileage rate in theory. The 2025 IRS mileage rate is 70 cents-per-mile. The IRS counts 33 cents-per-mile as the portion that covers depreciation. That's almost half of the overall costs of a vehicle. But there's a flaw to this calculation, which we'll explore below.
When the IRS calculates its mileage rate, a certain annual mileage is assumed. This annual mileage is around 14,000. But what if a driver only drives 10,000 annual miles for work? Or 7,000 annual miles for work? Will that driver still cover all work-related costs?
A driver receiving a cents-per-mile rate for business travel must drive a certain number of miles to cover expenses. This number will vary based on local gas prices, how much local mechanics charge, and how pricy auto insurance premiums are. Drive fewer miles than that magic number, and costs are not covered.
The more that person drives, the more likely the reimbursement will cover all costs. But insurance and depreciation will stay relatively unchanged whether the driver racks up a lot of miles or a little that month.
These two costs are considered fixed costs. Let's say a vehicle's annual depreciation is $4,000. If the owner drives around 14,000 miles per year, then the IRS mileage rate should be sufficient to cover that expense. But if the driver only drives 7,000 miles per year, depreciation may not be covered. The same is true of insurance because it is a fixed expense.
Two employees working for the same company can have very different experiences with reimbursements. A low-mileage driver might be under-reimbursed, while a high-mileage driver might be over-reimbursed.
If Driver A and Driver B live in the same county, drive similar vehicles, and carry the same auto insurance coverage, they should have roughly the same fixed costs (i.e. insurance, depreciation, taxes). But let's say Driver A travels 500 miles per month and Driver B travels 2500 miles per month.
Both will still experience similar insurance and depreciation costs. Driver A, driving less than half the average monthly mileage amount (1166 miles/month), will probably not cover those costs and mileage-based costs. Driver B, driving more than half the average monthly amount used by the IRS to calculate the rate, will more than cover all costs.
Simply put, if an employee does not drive enough, the employee's mileage reimbursement will not be enough to cover the reasonable business portion of their vehicle expenses.
Low-mileage workers often end up under-reimbursed. Mid-mileage workers who live in expensive regions are also at risk for under-reimbursement if you use a mileage rate. They simply may not drive enough to garner a reimbursement sufficient to cover insurance and depreciation along with their other vehicle costs. In states that require full reimbursement of expenses, that could create legal problems.
A better approach is to pay a fixed rate for fixed costs and a mileage rate for variable costs. This fixed monthly sum covers depreciation, insurance, taxes, and registration. Then a smaller mileage reimbursement rate covers the expenses tied directly to business mileage. This way, whether an employee makes few trips or many, their reimbursement will always match expenses.
This stipend-plus-mileage-rate approach can take many forms. The most cost-effective and fairest version is the fixed and variable rate reimbursement, also known as FAVR. The key distinction for FAVR is that vehicle reimbursements are based on a standard vehicle across employees, rather than a standard mileage rate. Vehicle standardization rather than rate standardization is the more equitable approach. (Here's why.)
Another key distinction is that FAVR payments, both the fixed stipend and the variable mileage rate, are generated based on the employee's zip code. This way the regional variations in fuel, insurance, and maintenance costs are taken into consideration, producing a fairer reimbursement method. This is particularly important in times of volatile fuel costs.
To learn more about how FAVR works and why it is the most adaptable vehicle reimbursement approach in these unpredictable times, read our ultimate guide to FAVR reimbursement by clicking the link below.