The IRS standard mileage rate for businesses may seem like a fair way to reimburse drivers. However, there are many considerations when determining a fair mileage rate for your business.
When considering ways to reimburse employees for vehicle travel, it is important to ensure that the method used is fair. One of the most common methods is to pay a cents-per-mile rate. The going rate for mileage in many places is $0.67/mile for 2024. This is the standard business rate set by the IRS. Some businesses come up with their own rate, such as 50 cents per mile.
However, the question of which mileage rate is fair will depend on several different factors, and not every business can answer it in the same way. We will explore these factors below.
A fair mileage rate will fully and equitably pay for the business portion of vehicle costs. Not all organizations operate similarly, and not all drivers have the same expenses. Consequently, you need to focus on your workers' specific circumstances.
These factors are important to understand first. Then you can determine the fair mileage rate for a particular set of employees.
To ensure that your employees receive a fair mileage reimbursement, you must first consider how often they use their vehicles for their jobs.
How much to reimburse for mileage depends on knowing the costs the rate covers. The costs covered by a vehicle reimbursement extend beyond the travel costs of fuel, tolls, and wear and tear. The business portion of vehicle ownership costs, like insurance and depreciation, are reimbursable.
If your employees only drive occasionally, the business portion of these costs will be minimal. The IRS mileage rate could be suitable for reimbursement for occasional travel.
But if your employees drive thousands of business miles annually, you should examine your mileage rate closely. The business portion of ownership costs will be challenging to cover with a mileage rate.
Some organizations pay a mileage rate alongside other vehicle use compensations. These kinds of plans can create expensive redundancies.
Some organizations pay a mileage rate on top of a regular lump sum like a car allowance. A fair mileage rate for those organizations will be less than for organizations that rely entirely on the mileage rate.
The same would be true for organizations that pay for fuel, since a typical mileage rate includes fuel expenses. You don't want to pay double for the same expense, so it is important to know what each payment is meant to cover.
Combining a car allowance with a mileage reimbursement can get prohibitively expensive. But in the case of a fixed and variable rate program, you can pay a fine-tuned and fair mileage rate on top of a regular lump sum. That set payment covers overhead expenses associated with owning a vehicle, such as car insurance. The mileage rate covers the costs of driving.
If your organization is not making any other payments, then a mileage rate alone requires much scrutiny. It could be easy to pick the IRS mileage rate. This federal rate has already been calculated for 2024 and theoretically represents what a fair rate should be for business travel.
However, when you understand how the IRS mileage rate is calculated, you see that it will not be fair for all drivers. The IRS rate is derived from average nationwide costs to drivers operating vehicles at 14,000 miles annually. If your drivers work in places that are more or less expensive than average or drive a lot more or less than average, then the rate will not be fair for them.
A driver's locations affects the vehicle costs the driver experiences. Some locations have higher gas prices than others. Insurance premiums vary widely from state to state. To calculate a fair mileage rate, you have to account for regional variations.
If your employees are based in the same region, they will experience similar base costs. Their insurance, registration, and taxes should be similar. They will face a relatively narrow range of gas prices and similar maintenance costs at local mechanics. This means a fair mileage rate might be the same for all your employees.
If you have employees working in multiple states, they will likely experience different costs based on their locations. Someone working in Los Angeles may pay almost $5/gallon for gas. At the same time, someone working in Houston would be paying under $3/gallon. Discrepancies between fuel costs, insurance rates, and maintenance costs can mean that a fair mileage rate for one employee would not be fair for another.
Some states have mileage reimbursement requirements that set a fair rate. The places with the most explicit rules are California, Massachusetts, Illinois, and the city of Seattle. Each of these locations requires employers to fully reimburse work vehicle costs. Businesses typically meet the requirement by paying the IRS mileage rate or a fixed and variable rate (FAVR).
The amount of miles employees drive also affects their rate of experiencing costs. The more you drive, the less you pay per mile in costs. This is because of the many fixed costs that come with ownership (insurance, registration, etc.).
If all your employees drive within a narrow mileage range, say 1,000 to 1,200 per month, they will incur vehicle costs at similar rates. (This assumes the location-based factors are equalized.) This means that a single mileage rate for all employees could be fair. The challenge of finding a single, fair rate for reimbursements increases when employees drive different amounts.
If some employees drive 500 miles per month and others drive 2,000, this disparity will affect costs. The fairness of a single mileage rate will decrease as this gap widens. Unless the mileage rate is pretty high, that low-mileage driver will not drive enough to cover all business vehicle expenses. This is because some costs exist regardless of how much they drive (insurance, depreciation, etc.). However, a high mileage rate for that 2,000/month driver will be overkill.
The IRS has approved a specific method to address both differences in location and differences in mileage. The fixed and variable rate (FAVR) approach takes care of the business portion of the fixed overhead costs in a separate payment and then calculates an appropriate mileage rate. This rate is based on how much the person drives and how expensive their location is. This method increases the fairness of the reimbursements.
Organizations whose employees have varying expense needs often partner with a professional reimbursement administrator (FAVR). This FAVR partner brings nationwide data and tried-and-true reimbursement algorithms. These tools allow the FAVR partner to set up a program that accurately and fairly reimburses every employee.
Learn more about the IRS fixed and variable rate reimbursement below, as well as plan administration.