For employees who drive a vehicle as part of the job, a mileage reimbursement is a key way to offset expenses. But what does a mileage reimbursement include? How do you know if your mileage rate is fair?

What Does a Mileage Reimbursement Cover?

A mileage reimbursement uses a cents-per-mile rate to calculate the cost of using a vehicle for work. The most common mileage rate in the United States is the standard business rate published annually by the IRS. This federal rate or "safe harbor rate" is viewed as the fair way to reimburse employee vehicle expenses.

What's a car expense that's often reimbursable?

The 2024 mileage rate of 67 cents per mile is designed to cover a range of costs. These reimbursable expenses include both owning and operating a vehicle used for business. Examples of a car expense that's often reimbursable include fuel, depreciation, insurance, and maintenance.

The standard federal rate is calculated using the average costs of a vehicle driven an average number of miles annually. This means the rate is most accurate for drivers who experience average costs. Some organizations develop their own mileage rate that they consider more suitable for their particular employees and their costs.

Does a mileage reimbursement include fuel?

Fuel is the most obvious expense associated with operating a vehicle. The 2024 IRS rate of 67 cents per mile includes fuel costs. However, differences in fuel prices between times and places can pose problems. Another challenge is the variations in fuel efficiency between different vehicles.

If gas prices over the course of the year even out, then the mileage rate may cover fuel costs. But if prices spike or plummet, the mileage rate may need adjusting. A standard mileage rate may also fall short in places with expensive fuel prices like California.

Does a mileage reimbursement cover car insurance?

A mileage reimbursement should be able to cover the business portion of an employee's car insurance. You calculate the business portion by the percentage of time or mileage spent on work responsibilities. Many employers require a minimum level of insurance coverage to protect both the employee and the organization from liability from accidents.

Using a mileage rate to reimburse insurance coverage can create a mismatch, however. Monthly mileage is a small factor in the insurance rate but the determining factor in the mileage reimbursement. As a result, a low-mileage driver may receive an insufficient reimbursement to cover insurance costs. That is why some organizations pay a monthly stipend that covers the known insurance premium and factor it out of the mileage rate.

Other car mileage expenses for work

Other obvious expenses are tires, oil, and maintenance. The more a person drives, the more often that driver must replace tires, change oil, and complete other routine maintenance. A mileage rate, because it calculates payments based on how much you drive, is well-suited to reimburse these expenses.

Less obvious expenses include taxes, license, registration, and depreciation. As with insurance, these fixed expenses should be reimbursed in proportion to the time spent using the vehicle for work. But these expenses are tied to the age, size, and value of the vehicle. Once again, low-mileage drivers may not drive enough to offset these costs with a mileage rate.

How much is a fair mileage rate?

A fair mileage reimbursement rate is accurate or nearly accurate for all the employees in the organization who are reimbursed for mileage. This is easier said than done.

The IRS standard business rate (67 cents-per-mile for 2024) is fairly accurate if an employee has average costs. But low-mileage and high-mileage drivers, as well as drivers in very expensive locations may not find it suitable. 

Calculating a fair mileage reimbursement

A standard mileage rate may not reimburse fairly unless your organization is local or regional. This allows you to determine a rate that is fair for workers within that locality or region. However, if there are major discrepancies between employee mileage amounts or employees are spread across the country, calculating a fair mileage rate gets complicated.

A smarter, more accurate mileage rate

An organization should review its mileage rate periodically to make sure it reflects current gas prices as they rise and fall. It can also place employees in tiers based on how much they drive and/or how expensive their location is. The different tiers are then reimbursed at different rates. All these reimbursements remain tax-free if they do not exceed the IRS business rate.

The problem of fixed ownership costs like auto insurance and depreciation still remains. This is why some organizations use the FAVR reimbursement method ("fixed and variable rate"), 

Fixed and variable rate reimbursement

A fixed and variable rate, or FAVR, reimburses fixed costs separately from the mileage rate. This approach increases accuracy of payments. A FAVR program also uses localized costs to determine rates. This allows a business to pay different mileage rates to employees based on location. 

Because FAVR, like the IRS rate, is a federal rate, payments remain tax-free. Employees must accurately track and report mileage, as with any mileage reimbursement.

How to review your company mileage rate

If your organization's mileage rate does not seem to be keeping up with expenses or seems to create unfair discrepancies between employees, it may be worth exploring one of these alternate options. Contact mBurse to learn more about which option would best fit your organization.

Or select the button below to try our 3-step process for calculating a fair and accurate reimbursement rate for your organization.