Mileage reimbursement is a way to recognize the efforts of employees who use their vehicles for work. A lot of confusion surrounds determining mileage rates and reimbursable expenses. This guide will clarify those questions.
Mileage reimbursement allows businesses to compensate employees for using their vehicles for work-related travel. It covers fuel, insurance, depreciation, wear and tear, and other auto-related expenses. The IRS sets a standard mileage rate every year as a guideline for calculating reimbursement.
When it comes to reimbursing expenses, employers have two options. The first option is mileage reimbursement using the IRS business mileage rate or a FAVR reimbursement plan. The second option is to reimburse receipts for actual expenses.
Most employers opt to pay the federal reimbursement rate or a FAVR reimbursement because these options involve fewer administrative headaches than accounting for receipts. Plus, payments remain tax-free for both the company and the employees.
Employees cannot deduct business mileage on their taxes during the tax years 2018-2025. This rule makes it attractive to employees to receive a mileage reimbursement or FAVR allowance. If an employee works in California, Massachusetts, or Illinois, their employer must supply a reimbursement to comply with state law.
Contractors are allowed to claim business mileage on their tax returns. Alternatively, they may claim actual expenses, which requires keeping track of insurance, fuel receipts, and more. For this reason, most 1099 workers use the IRS business reimbursement rate to calculate their vehicle expenses for tax purposes.
The IRS mileage rate is a standard rate the Internal Revenue Service sets. It considers various factors, including fuel costs and vehicle depreciation. For 2025, the federal mileage rate for businesses is 70 cents per mile. For 2024, the federal rate was 67 cents per mile.
The IRS rate is a benchmark that reflects the nationwide average vehicle operating cost. By adhering to this rate, companies can simplify their accounting processes and provide fair compensation. At the same time, because the IRS rate reflects national averages, it will not precisely reimburse some employees. Examples would be people who work in expensive regions or drive more or less than average.
The list of reimbursable expenses helps explain why adopting a mileage or fixed and variable rate reimbursement (FAVR) is essential. Any plan that reimburses these expenses via receipts will create administrative headaches.
AAA has created a helpful tool for understanding how the government calculates reimbursement rates. Their 2024 guide to annual vehicle expenses shows each expense you might incur and how much they amount to per mile.
The first category is depreciation. This expense refers to the lost value of a vehicle the longer you own that vehicle. AAA determines the cost of depreciation based on how much value a new car loses over the first five years. For 2024, this expense amounts to $4,680 per year.
The amount will be more or less depending on how expensive the vehicle is in the first place. Because the IRS uses a similar average number to calculate rates, your own vehicle's loss of value may or may not match this metric. This is why employers that adopt a FAVR vehicle plan use one standard vehicle to determine rates for all employees, regardless of what vehicles they drive.
Fuel costs per mile vary by region and vehicle. For 2024, AAA used $3.99/gallon and 15,000 annual miles to derive the expense per mile. AAA reports that the average expense is 14.9 cents per mile. This expense rises or falls depending on the type of vehicle. A mid-size sedan costs 12.54 cents per mile for gas, while a mid-size SUV costs 16.46 cents per mile.
The cost also varies by location. In 2024, gas in California cost more than $4.89/gallon, while gas in Texas cost less. A national mileage rate cannot consider differences in location or fuel efficiency.
While the IRS mileage rate includes fuel costs, businesses may reimburse fuel expenses separately. In this case, employees should submit fuel receipts for reimbursement. This approach can be particularly beneficial for employees who operate vehicles with varying fuel efficiency or are located in areas with significantly higher fuel prices.
However, you cannot pay both a mileage rate and a separate fuel reimbursement for tax purposes. If an employer does so, only one can be issued tax-free.
Apart from mileage, businesses may reimburse other vehicle-related expenses, such as parking fees and tolls. These should be documented and submitted alongside the mileage reimbursement form. Mileage reimbursement rates may not include tolls, but they do include several other expenses.
Wear and tear refers to the gradual damage that occurs to a vehicle over time. It is often a catch-all term for routine maintenance and repairs, including tire replacements. The IRS mileage rate takes wear and tear into account, so there's no need to calculate it separately. However, it helps to understand how much these expenses amount to.
The AAA report calculates maintenance, repairs, and tires at 10.13 cents per mile for 2024. This number, however, includes the expense of an extended maintenance warranty, which is not covered by a mileage reimbursement. This is because an extended warranty is not a necessary vehicle expense.
Many people forget that government fees and taxes are reimbursable expenses for vehicles. These costs may not amount to much compared to depreciation, fuel, or maintenance, but they do factor into overall costs. These fees vary by location, as some states do not tax vehicle ownership, and some localities charge higher fees than others.
However, the business-use portion of these expenses is reimbursable since a vehicle owner must pay license, registration, and taxes. Both the IRS mileage rate and FAVR rates take these fees into account. FAVR programs factor in the actual location, making the reimbursement more accurate.
Mileage reimbursements include the cost of auto insurance coverage. The AAA calculation for 2024 is $1,715 per year for full coverage. However, once again, location plays a significant role in determining costs. In Florida, for example, the average premium is nearly $4,000 per year, while in Vermont it is only $1,628.
For this reason, a FAVR vehicle plan separates insurance costs by location and reimburses them directly. The auto insurance declarations page provides a summary of your insurance policy, including coverage limits and deductibles. An employer can require employees to submit this policy declaration page as proof of insurance and to derive accurate reimbursements.
When using a personal vehicle for business, ensure your insurance covers business travel. This step is crucial to protect the employee and the company from potential liabilities associated with work-related travel incidents. Employees should review their auto insurance declarations regularly to ensure necessary coverage.
The cost to finance a vehicle is not a reimbursable expense. This is because car payments consist of interest payments to the lender. Interest on the cost of the vehicle is not a strictly necessary expense of ownership.
Furthermore, the cost of owning the vehicle is already a factor in the depreciation category. Depreciation considers the difference between the price you paid for a vehicle and the price you can sell it for year over year. This price steadily decreases over time, making that decrease an expense of ownership.
The simple way to calculate a mileage reimbursement is to multiply business mileage by the IRS mileage rate. If your annual business mileage for 2024 is 15,000 miles, then your 2024 reimbursement would be $10,050. If your annual mileage is 10,000, your reimbursement would be $6,700.
Most businesses pay mileage reimbursements monthly. Employees record their mileage for each business trip and submit it at the end of the period. This approach is far less laborious than submitting receipts for actual expenses.
Be aware that the cost per mile decreases as mileage increases. AAA reports that the cost per mile is $1.06 at 10,000 miles per year and $0.82 at 15,000 annual miles. Note that both numbers exceed the IRS rate of $0.67 per mile. This is partly because AAA includes financing a vehicle and purchasing an extended warranty. These are not reimbursable expenses covered by the IRS rate or by a FAVR rate.
The difference of 24 cents per mile will remain even after subtracting the financing and warranty. Consequently, while the nationwide IRS business rate may work for a 15,000-mile driver, it will fall short for a 10,000-mile driver. This is another reason some businesses adopt an FAVR vehicle program instead since the rates adjust in relation to annual mileage.
Using a mileage reimbursement calculator can simplify the process. Input your total miles and the current IRS rate, and it will automatically calculate your reimbursement. These calculators often come with additional features, such as the ability to store trip histories and generate detailed reports, which can be helpful in tax filings and audits.
A standardized mileage reimbursement form streamlines the process and ensures all necessary information is collected. A well-structured form can serve as a document for both internal record-keeping and external audits.
A well-structured form facilitates smooth processing and acts as a record for future reference, aiding in financial audits and compliance checks.
An automated mileage tracker is even better than a mileage form or calculator. Many businesses have adopted mobile apps that track business mileage in real time. Drivers can then edit out any personal trips before submitting the mileage for approval.
The best mileage apps have several features to facilitate the process of mileage reimbursement:
Independent contractors can also benefit from a mileage tracking app to ease the tax deduction process.
Calculating mileage reimbursement rates doesn't have to be complicated. You can efficiently manage reimbursements by understanding the IRS rules, keeping accurate records, and using mileage calculation tools. But is it better for your business to use the IRS mileage rate or an IRS-approved FAVR plan?
As detailed in this guide, both methods are tax-free. The federal rate is more straightforward and works well for near-average vehicle costs. A FAVR program uses more precise rate calculations, which makes it more challenging to administer. However, the organization provides fairer payments that consider location and mileage differences.
To learn more, try our comparative rate calculator.