Many people use a personal vehicle for work. Some are employees and some are self-employed. Here is a guide to laws related to personal vehicles and best practices for reimbursements.
Some businesses require employees to have a vehicle for their jobs. Some self-employed workers use a personal car instead of purchasing a car for the business. Either way they are putting a personal vehicle to business use.
For employers it is important to follow certain rules when requiring employees to use a vehicle. Employees risk a valuable asset for the company and should be compensated. Compensation can take many forms, including an allowance, a mileage reimbursement, or a fuel card. Some states and localities have laws that govern reimbursement of vehicle costs.
At the federal level, no law requires compensation for a personal vehicle used for business. But the employer may write off payments to an employee to reimburse vehicle costs. For this, the employer must follow the guidance of IRS publication 463. Self-employed workers also may deduct business mileage on their taxes. Employees may not deduct work-related vehicle costs, so employers must fill in the gap.
A personal vehicle used on the job will incur wear and tear over time. This wear and tear will occur more quickly as the person drives more for work. This reality places a responsibility on the business to offset such expenses as depreciation, maintenance, insurance, and fuel. Calculating these expenses can be time-consuming. This is why many businesses either estimate or use a federal rate like the IRS mileage rate or the fixed and variable rate (FAVR).
Many businesses traditionally have provided a vehicle for employees. Because of the high expenses of owning and operating vehicles, fewer companies provide cars today. Here are some less expensive alternatives that businesses have pursued.
Some companies provide a regular monthly payment intended to cover vehicle costs. This allowance is a form of direct compensation that employees receive on top of their salary. The IRS treats car allowances as taxable income. As a result, the take-home amount may not actually cover work-related vehicle costs.
Reimbursing car costs avoids taxes if the company follows the rules. Few businesses directly reimburse costs. Instead, most pay a mileage reimbursement rate, often derived from the federal rate for that year. The IRS business mileage rate for 2025 is 70 cents per mile.
Instead of offering a company car, an organization might pay for gas on top of a car allowance. Or if they are more on the cutting edge, they may adopt a FAVR vehicle program. A FAVR program uses localized cost data to generate car reimbursement payments.
The federal government has no requirements around employee vehicles as long as the vehicle costs do not reduce wages below the minimum wage. As a result, some states have stepped in to pass laws related to personal vehicles.
The states of California, Massachusetts, and Illinois have strict laws requiring employers to reimburse vehicle costs. Other states have less strict laws but may still place some requirements on employers. Reimbursement for business use of a personal vehicle can vary from state to state. Here is a guide to employee reimbursement laws by locality.
Many states have set minimum wages much higher than the federal minimum wage of $7.25/hour. In states with high minimum wages, employers must take care to avoid allowing work vehicle costs from eating into wages. This reality provides another reason to pay an allowance or reimbursement for personal vehicle use.
Compensation for using a personal vehicle for work can get complicated and costly. The objective is to provide fair payments without creating budget problems. Best practices include the following:
Choosing a tax-free method to cover employee vehicle costs makes the most sense. Taxes eat into take-home pay and increase the overall cost of the program. A non-taxable approach like the IRS mileage rate or a FAVR plan directs all payments to employees.
Different states and localities experience different vehicle related costs. From gas costs to insurance rates, prices vary, and this variation impacts work vehicles. Using localized cost data to determine how much to reimburse can provide an equalizer.
The IRS recognizes two federal reimbursement rates: the standard business rate and the fixed and variable rate (FAVR). Both pay for personal vehicle use tax-free. But FAVR uses localized costs to determine payments and separates out certain types of costs for increased accuracy. Partnering with a FAVR vendor organization can take out all the guesswork.
Adopting the right software can make it easy to track and reimburse mileage. Employees can download a mobile app to do the tracking and calculating. Managers can use a cloud-based dashboard that imports the data, generates reimbursements, and delivers helpful productivity reports.
Require employees to keep a proof of car insurance updated. Proper proof means a copy of their insurance declarations page less than six months old. Also, make routine checks of motor vehicle records in case an employee has a violation. Employee driving behavior while on the job can expose the company to liability.
When it comes to managing personal vehicles at work, establishing a clear and competitive policy is necessary. A clear policy sets the method of compensation, when payments are made, and how payments are calculated. A clear policy should also reduce liabilities related to employee insurance lapses and moving violations.
A competitive policy will compensate vehicle use at a level that attracts and retains employees. The federal mileage rate often offers a helpful benchmark, but in less expensive states it may be overkill. This is another reason opting for a FAVR plan works best for many organizations. Get an mBurse benchmarking report today to plan your policy.