In 2024 the IRS standard mileage rate for business may seem like the fair way to reimburse drivers. But there are many considerations to look at when determining a fair mileage rate for your business.
When considering the possible ways to reimburse employees for vehicle travel, it is important to make sure that the method used is fair. One of the most common methods is to pay a cents-per-mile rate. Some businesses pay the IRS standard rate, which is $0.67/mile for 2024. Others will come up with their own rate, such as 50 cents per mile.
But the question of which rate is a fair mileage rate will depend on several different factors, and not every business will be able to answer the question 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 associated with travel for work. Because not all organizations operate in the same way, and not all drivers have the same expenses, you'll need to answer some questions up front to get a clearer sense of your workers' specific circumstances.
These factors are important to understand before determining 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. This is because the costs covered by a vehicle reimbursement extend beyond just 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 on occasion, then the business portion of these costs will be minimal. The IRS mileage rate or a somewhat lower rate could be suitable as a reimbursement for occasional travel.
But if your employees drive on a regular basis, incurring thousands of business miles annually, you will need to take a close look at your mileage rate. The business portion of vehicle ownership costs will be high and may be difficult to cover with a mileage rate.
If an organization pays a mileage rate on top of a regular lump sum like a car allowance, then a fair mileage rate for that organization will be less than for an organization that relies entirely on the mileage rate. The same would be true for an organization that pays for its employees' fuel, since a typical mileage rate has fuel expenses factored into it.
You don't want to be paying double for the same expense, so it is important to be clear on what each payment is meant to cover. The combination of 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 payment for recurring overhead expenses associated with owning a vehicle, such as car insurance.
If your organization is not making any other payments, then a mileage rate by itself requires a high amount of scrutiny. It could be easy to just pick the IRS mileage rate, since it 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 a fair rate for all drivers. The IRS rate is derived from average costs applied across the whole country to drivers operating vehicles at the average amount of 14,000 miles annually. If your drivers work in places that are more or less expensive than average or drive a lot more or a lot less than average, then the rate will not be a fair rate for them.
If all of your employees a based in the same region, then they will experience a similar base set of costs, such as insurance, registration, and taxes. They will encounter a relatively narrow range of prices at the gas pump and similar costs for maintenance at local mechanics. This means that a fair mileage rate might be the same rate for all of your employees.
If you have employees working in multiple different states, then your employees likely will experience different costs based on their locations. You could have someone working in Los Angeles and paying almost $5/gallon for gas, and someone else working in Houston and paying under $3/gallon. These kinds of cost discrepancies, which effect not only fuel costs but also insurance rates and maintenance costs, can mean that a fair mileage rate for one employee would not be fair for another employee.
The challenge of finding a single, fair rate for business reimbursements increases when it comes to employees who drive different amounts. If all your employees drive within a fairly narrow range of mileage, say 1,000 to 1,200 per month, then they will incur vehicle costs at similar rates (assuming the location-based factors are equalized). This will mean that a single mileage rate for all employees could be a fair rate.
But if you have some employees who drive 500 miles per month and others who drive 2,000, then you have a wide disparity that will greatly effect the fairness of the mileage rate. Unless the mileage rate is pretty high, that low-mileage driver will probably not drive enough to cover the business portion of all their vehicle expenses, since some must be paid regardless of how much they drive (insurance, depreciation, etc.). But a high mileage rate applied to that 2,000/month driver will be overkill.
Or you can try the fixed and variable rate (FAVR) approach that takes care of the business portion of the fixed overhead costs in a separate payment and then calculates an appropriate mileage rate based on how much the person drives and how expensive their location is.
For organizations with employees with a variety of vehicle expense needs, it is often best to partner with a professional reimbursement administrator. By leveraging their nation-wide data and tried-and-true reimbursement algorithms, a FAVR vendor can set up a program that accurately and fairly reimburses every single employee.
To learn more about mBurse FAVR programs, get a plan comparison analysis below. Or try our rate development program, which is allows you to walk away with a free optimized reimbursement rate for your organization if you do decide not to partner with us for program administration.