No federal law requires employers to reimburse their employees' business vehicle expenses. But many companies choose to – for good reasons.
Are employers legally required to reimburse mileage?
Federal laws and car reimbursements
Federal law requires that all workers receive at least the federal minimum wage, which is currently $7.25/hr. This means an employee's work-related vehicle expenses cannot reduce take-home compensation below $7.25/hr. To prevent this outcome an employer may pay extra to offset costs or reimburse these costs. (Pizza delivery drivers and other restaurant workers are particularly susceptible to this kind of under-compensation.)
State laws and mileage reimbursements
Many states and localities have significantly higher minimum wages. In California, the minimum wage is $16/hr. In many states in the mid-Atlantic and northeast, the wage ranges from $12/hr to $17/hr. If a worker's vehicle expenses should not reduce compensation below the local minimum wage.
Some states, such as California, Illinois, and Massachusetts, have labor laws that require employers to reimburse work expenses. These business expense indemnification laws typically require businesses to use one of three methods to offset costs:
- Actual expense: directly reimburse all business vehicle expenses
- Mileage reimbursement: pay an acceptable mileage rate (such as the IRS standard business rate or a fixed and variable rate plan)
- Additional compensation: provide a car allowance or vehicle stipend
Should an employer reimburse mileage if they don't have to?
Paying a competitive mileage rate
Many states do not explicitly require business reimbursements but have worker-friendly laws that encourage it. These states include New York, Montana, the Dakotas, Iowa, and New Hampshire.
Regardless of laws, many businesses pay a mileage rate to boost their benefits package and stay competitive. Hiring and retaining top employees should be one of the highest considerations for an employer considering whether to offer mileage reimbursement.
Paying a fair wage to workers
But it's not just a matter of staying competitive. It is also a matter of treating employees fairly and ensuring that they get to keep all their salary. If the company is passing along business expenses to employees, that will create frustration and increase attrition.
It is not always best, however, to use a mileage rate as the method of reimbursement. Let's explore when and how to reimburse employees for mileage.
How to set your business's mileage reimbursement plan
Here are some common questions about when and how to reimburse employees for personal vehicle use. Using the answers, you can evaluate your own organization's practices and whether a change is needed.
Does commute mileage get reimbursed?
No. A commute from home to a company office and back should not be considered business mileage. To distinguish between business mileage vs. commuting, factor in business-related stops. If an employee makes a business trip on the way home any mileage above the distance from office to home may be reimbursed.
Is there a business mileage deduction?
Only businesses and independent contractors may currently claim mileage as a tax deduction. For tax years 2018-2025, employees may not deduct business mileage or business expenses on their taxes.
Before 2018, many employers relied on this deduction as a reason not to reimburse employees for mileage. It is imperative for employers remember that their workers cannot write off mileage.
Is business mileage reimbursement taxable?
To keep a mileage reimbursement tax free, the IRS requires two things.
- The mileage reimbursement rate should not exceed the standard business rate for that year ($.67/mile for 2024).
- The employer must keep suitable records of employee business trips and mileage,.
What is an IRS-compliant mileage log?
An IRS-compliant mileage log should contain the following information:
- Total business mileage for the year
- The total mileage for the year
- Each trip’s date, destination, and purpose
For business reimbursements, you need more frequent reporting – typically once per pay period. This process can be tiring if the company uses a spreadsheet instead of a mileage tracking app.
What's the best mileage tracker for business?
App-based mileage tracking has become today's norm. Using GPS technology in the employee's mobile device, these apps record mileage in real time. Choose an app that protects privacy by keeping a wall between instant mileage tracking and periodic mileage reports.
The mBurse app, mLog, is a hands-free, accurate mileage tracker that protects employee privacy. mLog works well for both large and small organizations.
What is the current business mileage rate?
Many businesses use the federal mileage rate of 67 cents per mile. However, while the IRS business rate is the norm, it may not be a fair rate for an entire organization. This is because the IRS rate reflects the national average cost of owning and operating a vehicle per mile.
A national mileage rate often creates inequalities when used for reimbursements. This is because different workers experience different costs depending on where they live and how much they drive.
How to calculate a fair mileage reimbursement rate
Standard mileage rates and inequities
Using a standardized mileage rate will often introduce inequities. The biggest inequities will exist between high-mileage and low-mileage drivers and between drivers in different regions. The larger and more widespread a company is, the greater the variety of business travel costs. Employee reimbursements can get pretty complicated in this way.
It is also important to know that low-mileage drivers often cannot recoup all of their business-related vehicle expenses because they cannot drive enough miles to deliver a sufficient reimbursement amount. High-mileage drivers may attain a reimbursement that exceeds their actual costs.
Fixed and variable rate (FAVR plan)
Many organizations have adopted FAVR reimbursement plans instead of standardized mileage rates. FAVR plans deliver equitable reimbursements to employees that comply with IRS taxation rules and state labor codes.
Drivers incur both fixed vehicle costs and variable costs. However, standard mileage rates do not distinguish these costs clearly enough. This results in inaccuracies. A fixed and variable rate plan (FAVR) makes the proper distinction, increasing accuracy of payments.
Contact mBurse to learn more about tools to support your mileage reimbursements, rate development, or customized reimbursement administration.
