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Should a Company Pay Less than the IRS Mileage Rate?

Written by mBurse Team Member   |   May 13, 2024 6:30:00 AM
2 min read

Many companies use the IRS's published standard mileage rates as a mileage reimbursement rate. However, the question of whether to pay that exact rate to employees is actually somewhat complicated.

Can an employer pay less than the IRS mileage rate?

Let's first establish that reimbursing with the IRS standard business rate is entirely optional for employers. At the 2025 rate of 70 cents per mile, this is an expensive mileage rate to use as a vehicle reimbursement. But that rate is just a guideline.

Non-taxable mileage rate guidelines

The published rate serves as a guideline for determining whether a car reimbursement is non-taxable. A company can pay more or less, but it is important to know the consequences of each choice.

Paying a mileage rate equal to or less than the IRS standard keeps the reimbursement tax-free to employees, as long as the company keeps timely and accurate records of business trips and mileage for each employee. Paying more than the IRS rate results in taxes on the portion of the reimbursement that exceeds the published rate.

Choosing a tax-free mileage pay rate

Some employers choose to pay less than the IRS reimbursement rate to save money. However, since the standard federal rate is a national rate, it may be excessive in less expensive locations.

Other employers may choose a FAVR rate. One advantage of FAVR is that it generates rates based on local costs, avoiding problems with a national rate. But many employers pay a lower rate because they do not believe employee vehicle costs are high enough to warrant it. The question is, how do they know for sure?

States with mileage reimbursement laws

Some states have reimbursement laws that encourage employers to reimburse at the IRS safe harbor rate. California, for example, requires full reimbursement of all employee business expenses. In the past, courts have found the federal rate sufficient to cover these expenses. This means that companies operating in California, Massachusetts, Illinois, and other states could find themselves breaking the law if they reimburse at a lesser rate.

At the same time, the IRS mileage rate is not 100% foolproof in very expensive locations. If an employee can prove that their work-related costs exceed their reimbursement amount, they can sue the employer to recover the deficit. A low-mileage or mid-mileage driver in an expensive location might not accumulate a high enough reimbursement amount each month to cover all vehicle costs. 

The IRS Mileage Rate

 

When should you pay more or less than the IRS mileage rate?

Here are three situations in which an employer should NOT pay the IRS mileage rate for employee reimbursement.

1. Employees do not receive a sufficient amount at the IRS rate

If an employer is concerned that some employees may not receive a sufficient reimbursement at the IRS rate, then they should explore other options. This is especially important if these employees operate in a state with strict labor laws. But it is important to consider non-taxable options, since taxation only adds further costs to the company and reduces employee take-home pay.

2. Employees experience a wide range of vehicle costs or work in different regions

A standard rate like the IRS rate cannot account for wide variations in employee costs. If all employees drive relatively similar mileage amounts and work in regions with relatively similar gas prices, insurance rates, and maintenance costs, the IRS rate might work. But this assumes that 70 cents per mile multiplied by the average mileage amount matches those vehicle costs.

If some employees drive 2000 miles per month while others drive 1000, they will incur costs at different rates. The discrepancy will grow if some employees work in expensive regions while others do not. You could be violating a labor code in one state while over-reimbursing in another state.

3. Employees report their business mileage manually or on a spreadsheet

Some businesses pay less than the IRS rate to rein in costs. However, some employees may "guesstimate" or buffer their mileage to boost their income. This makes it crucial to use an automated mileage tracker to reduce inaccurate mileage reports. The mLog app, for example, uses GPS technology to record employee mileage in real time; however, there is a short delay for the mileage to reach the dashboard to give employees time to "clean up" their mileage. 

What mileage rate should you pay?

To avoid overpaying or underpaying, you need to find a cents-per-mile rate that best fits your organization's needs. The best approach combines mileage pay with fixed payments based on local costs.

Fixed and variable rate

FAVR, or fixed and variable rate reimbursement is an alternate IRS-recommended method. FAVR is tax-free but holds the advantage of delivering reimbursements based on the varied expense levels of different employee zip codes.

Fixed and variable rate reimbursement also does a much better job protecting employers from infringing on labor laws, leaving employees under-reimbursed, or over-reimbursing high-mileage employees. This is because it combines a smaller mileage rate with a flat monthly payment calculated for each employee.

To learn more about FAVR and how it could work for your organization, follow the link below, or schedule a discovery call with mBurse.

FAVR how it works

 

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