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How Does Mileage Reimbursement Work?

Written by mBurse Team Member   |   Feb 12, 2025 7:06:43 AM
2 min read

When employees drive a personal vehicle for work, employers often pay a mileage reimbursement to offset costs. This guide covers how it works, how to set a mileage rate, and best practices for reimbursements.

What is a mileage reimbursement?

A mileage reimbursement consists of a mileage rate multiplied by miles driven for business. An employer pays this rate to offset the high costs of using an employee-owned vehicle for work purposes.

Employers may set the rate based on the published IRS business rate, competitor benchmarks, or estimated driving costs for employees. Only business mileage is reimbursable, however.

How a mileage reimbursement works?

Here's how mileage reimbursement works:

The company selects a cents-per-mile rate and pays employees that rate multiplied by how many business miles they drive each month. Like this:

Cents-per-mile rate x number of miles = mileage reimbursement

What counts as business mileage?

Business mileage generally includes trips for work purposes outside of the daily commute. Examples:

  • Driving between company office locations
  • Driving between meetings with clients
  • Making deliveries or running work-related errands

Remember that commuting from home to the company office does not count. The same is true of personal errands taken during the work day or as detours from a business trip.

2025 mileage reimbursement rates

Every year, the IRS sets mileage rates to reimburse business mileage and to deduct business and charitable mileage on taxes. The business mileage rate for 2025 is 70 cents-per-mile. A company may reimburse an employee tax-free at this rate for business mileage.

Alternately, the employer could opt to pay a lesser mileage rate. A lesser rate may be appropriate in parts of the country with below-average vehicle costs. Or they may pay a fixed and variable rate (FAVR).

How to calculate a mileage reimbursement

Calculating a mileage reimbursement is easy. To do so, multiply the mileage rate by miles driven during a payment period. Here's an example of a driver who drove 1,000 miles and was paid the federal rate:

1,000 miles x $0.70 = $700

Not all mileage driven during the month can count toward reimbursement. Calculating mileage depends on understanding the concept of business mileage. 

How to record business mileage

First, remember what counts as business mileage. Business mileage includes trips made for business purposes but excludes commuting miles.

You can determine business mileage in two ways:

  • Record the odometer reading before and after a business trip and subtract it. Then, record the mileage details in an IRS-approved log.
    OR
  • Use a GPS mobile app like mLog to record mileage automatically. You can categorize trips as business or personal.

What does a mileage reimbursement cover?

Operating a personal vehicle for business generates more expense than just gas. Gas and mileage reimbursement are not the same thing. A gas card just covers fuel. But a mileage reimbursement covers a range of expenses, including gas.

Reimbursable expenses include these additional costs:

  • Oil changes and other maintenance
  • Taxes and registration
  • Car insurance premiums
  • Wear-and-tear and depreciation 

Reimbursable vehicle costs might amount to more than you expect. Depreciation and insurance together comprise about 60% of the average American driver's vehicle costs. Does your mileage rate fully cover your costs?

2025 Mileage rate for automobiles

Are mileage reimbursements taxable?

Tax-exempt reimbursement plans

You pay no taxes on a mileage reimbursement if you receive the IRS mileage rate or less – $.70/mile for 2025. Some companies pay a fixed monthly car allowance and a modest mileage rate. In this case, the allowance is taxed but not the mileage rate. 

Alternately, a reimbursement plan called fixed and variable rate reimbursement pays both a fixed stipend and a variable mileage rate. This approach, also known as a FAVR reimbursement, remains non-taxable as well.

Deducting mileage on 2024 tax returns

Under the Tax Cuts and Jobs Act of 2017, employees cannot write off business mileage. Only self-employed drivers can write off mileage using the 2024 business rate of $.67/mile.

Before this law was enacted, an employee could only deduct unreimbursed business expenses. Any reimbursed mileage would be excluded because the company had already paid for it tax-free.

These tax rules expire at the end of 2025 if Congress does not extend them. But this would only apply to unreimbursed mileage. Alternatively, a taxpayer could use the expense method of calculating deductible costs using receipts for purchases.

When should a business reimburse for mileage?

Mileage reimbursement laws

No federal law requires employers to reimburse mileage, but some state laws do. California, Illinois, and Massachusetts all require full reimbursement of personal vehicle expenses incurred on the job. Several other states have employee-friendly laws that also affect mileage reimbursements.

In March 2024, a federal court found in favor of a pizza delivery driver who wanted to be reimbursed for driving costs. This decision could set a precedent that pushes more employers nationwide to provide business vehicle reimbursements.

National mileage rate vs. local costs

When evaluating a mileage plan, make sure to understand how the IRS determines its standard mileage rate. Each year, the IRS calculates the federal business mileage rate based on average costs for U.S. drivers. If you do not incur average costs and drive close to the average number of miles (14,000), the IRS rate might not work.

The standard mileage rate for 2024 was 67 cents per mile. This rate worked well for drivers who experienced average costs at the average mileage amount. But the 2024 standard mileage rate did not work for all drivers. The same is true of the standard mileage rate for 2025 of 70 cents per mile.

What's the best way to track business mileage?

IRS-compliant mileage logs

In order to receive a mileage reimbursement, you must keep track of miles driven. Your employer may leave it up to you to track and report mileage, or you may have a system that calculates your mileage. For IRS compliance, a detailed log must include the date and purpose of each trip, the miles driven, and relevant locations.

Woman on phone in car

Automated mileage tracking

Recording and reporting mileage can be time-consuming. What if all you had to do was open an app on your phone at the beginning of a trip, and that was it? A mileage tracking app uses GPS to automate mileage tracking and recording. This lets you focus on your job rather than adding up and reporting miles.

Mileage apps and privacy protections

But what about privacy? The mBurse mileage tracker, known as mLog, tracks mileage in real time but only reports business miles—not in real time. No personal trips are reported. However, if you forget to turn the app off during a personal errand, you can always edit the trip.

How to calculate a mileage rate

Comparing expenses and reimbursements

When paying or receiving a mileage rate, it's important to compare expenses to reimbursement amounts. Workers in an expensive part of the country or who drive fewer miles than average may find their reimbursement falls short. High gas prices may reduce wages since most company mileage rates are not responsive to gas prices.

Estimating monthly vehicle costs

Looking back at the list of expenses that a mileage rate covers, you can estimate monthly costs. Receipts and credit card statements can help calculate how much a driver pays per month for gas and other expenses, etc. There are car depreciation calculators online. (Or try this free tool.)

Asking for a better mileage reimbursement

Employees have a right to expect employers to reimburse business expenses fully. The law requires employers to reimburse all work-related vehicle expenses in some states, such as California and Illinois.

When employees do not receive sufficient reimbursements at their company's rate, a change should occur. It may be time for the employees to request a more robust vehicle reimbursement. Even better, management should review the rate regularly to ensure that it keeps up with costs.

The IRS Fixed and Variable Reimbursement (FAVR) reimbursement vs. IRS mileage rate

When workers use personal vehicles for business purposes, they deserve compensation for the expense. What is the best reimbursement rate for your business?

If you already pay or receive the IRS mileage rate of $.70/mi, increasing the rate is counter-productive. Anything over that rate will be taxable income. Instead, the best interest of both company and employees could be fixed and variable rate reimbursement.

A Fixed and Variable reimbursement (FAVR) plan provides highly accurate vehicle reimbursements. The fixed monthly car stipend pays for fixed costs like insurance. The variable rate adjusts to changes in gas prices. And all payments remain tax-free. For several reasons, a FAVR plan is fairer than a simple mileage rate.

Try out our calculator to learn more.

FAVR how it works

 

Mileage reimbursement FAQs

Does mileage reimbursement include gas?

Yes, a mileage reimbursement should cover fuel costs. The IRS calculates expected fuel costs when calculating the standard business rate each year. If your organization pays a different rate, it should ensure that all fuel costs are covered.

Can you get reimbursed for gas and mileage?

Typically, an employer will reimburse mileage or gas, but not both. A mileage reimbursement is intended to cover fuel costs. A gas reimbursement often pairs with a company car or a car allowance program. A gas and mileage reimbursement must not exceed the federal rate in total, or there may be tax implications.

How do you calculate gas mileage for reimbursement?

A company mileage rate does not calculate mileage reimbursements based on the gas mileage of employees' vehicles. The IRS uses average fuel costs to calculate its standard business rate. A FAVR program uses a standard vehicle to calculate fuel costs based on that vehicle's fuel efficiency.

How do you count mileage for work?

To calculate mileage for work, include all miles driven between the office and work sites and from work site to work site. Work sites include delivery locations, visits to clients, and destinations of work errands. Commuting miles do not count for reimbursements. 

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