Why the IRS Mileage Rate Overpays Some Workers and Underpays Others

Written by mBurse Team Member   |   Feb 20, 2023 3:30:00 PM
2 min read

You don’t have to overpay to reimburse your employees – unless, that is, you’re paying the IRS standard mileage rate. With ease comes a price, but there are alternatives.

Why businesses use the IRS mileage rate for reimbursements

The business mileage rate issued each year by the IRS has become the standard rate for many companies that reimburse employees for business travel. What was originally designed to allow taxpayers to deduct business mileage has now become the expected method of calculating employee reimbursements for business travel.

For many organizations, accurate mileage reimbursement is not a priority. Finding the easiest solution is. But that ease carries a price because the tax deduction tool called the IRS rate is based on national averages, not individual travel expenses, unlike the alternative, FAVR reimbursement.

IRS Rate v. FAVR - Calculate Savings

What is the current IRS business mileage rate?

For 2023, the published IRS mileage rate is $0.655/mile. That means the standard mileage reimbursement for employees across the U.S. will also be 65.5 cents/mile. If that’s your organization, let me ask you two questions:

  • What employee expenses does your mileage reimbursement cover?
  • How many of your employees actually incur costs equivalent to their reimbursement? 

If you cannot answer these questions, you may have a serious problem. How do you know you aren’t overpaying? How do you know you aren't underpaying? You’re reimbursing with a rate that’s not transparent or quantifiable.

What does the IRS rate mileage reimbursement actually pay for?

A mileage reimbursement rate covers a wide range of vehicle expenses: gas, oil, tires, maintenance, insurance, depreciation, taxes, registration, and license fees. All these expenses vary from driver to driver.

Without a "standard" employee expense profile, there can be no "standard" mileage reimbursement rate. If you have employees in four different states, these employees are going to pay different amounts to own and operate their personal vehicles:

  • Different gas prices
  • Different insurance costs
  • Different taxes and registration fees
  • Different depreciation amounts
  • Different maintenance costs

How can paying each employee the same rate cover a variety of costs? An employee who travels 1000 miles per month will certainly incur fewer costs than an employee who travels 2000 miles per month. But will the cost difference really be double? And will the high-mileage driver actually incur $1,310 per month in expenses?

Driving productively vs. driving for dollars

Paying a cents-per-mile reimbursement, while simple and easy, always carries the risk of overpaying employees – especially at the federal mileage rate of 65.5 cents per mile. Here are two reasons why:

  1. The more mileage employees report, they more money they earn.

A generous cents-per-mile rate like the government rate incentivizes unproductive, unnecessary driving. Even worse, if employees self-report mileage, then they have an incentive to exaggerate their mileage.

This is why it is important to pair a reimbursement plan with a mileage tracking system that ensures accurate reporting. Mobile apps can do this while integrating with an organization's expense system. But it is key to choose a mileage tracker that protects privacy.

21st century mileage capture

  1. Fixed vehicle costs (e.g. insurance, depreciation, etc.) do not significantly increase with increased mileage. 

The more you drive, the less it costs to operate your vehicle per mile. Drivers receive a steadily increasing benefit per mile from a mileage reimbursement the more they drive. This is because the cents-per-mile rate doesn’t decrease as their costs-per-mile decrease. The further beyond the average mileage for a U.S. driver, the more that $.655/mile rate overpays.

By the same token, the less a driver drives, the more likely the standard rate will underpay. This is especially true of workers who drive well below the average mileage used to calculate the federal rate. They deal with fixed costs (insurance, depreciation, registration, taxes) that are only negligibly lower than the fixed costs of colleagues who drive more miles.

Rate standardization is a problem for cents-per-mile reimbursements

The government mileage rate is not the only way to reimburse your employees. But most organizations don’t want to leave the paradigm of a standardized, cents-per-mile reimbursement.

When an organization sees costs exceeding what is identified as a “manageable” expense, the typical response is to:

  1. Find a mileage log that will help calculate mileage.
  2. Find a mileage log that will make employees more accountable.
  3. Reduce the mileage rate.
  4. Re-establish commuter rules (i.e. clarify what counts as business travel).

All of these reactionary steps are efforts to offset the increased costs of business travel. The first two can be helpful in decreasing unproductive driving. But none of these reactions gets to the root of the problem. 

The root of the problem is the standardized rate. Not many organizations ever question the idea of paying a standard mileage reimbursement for all employees. But given the variations in mileage amounts and the costs of driving per mile, it makes sense to vary the reimbursement rate itself.

When your organization reimburses the IRS mileage rate, all you are doing is reimbursing the maximum amount for all employees to drive their vehicle under an IRS-accountable plan (i.e. a non-taxable reimbursement plan). It’s not fair; it’s just equal. And expensive.

Alternatives to the IRS business mileage reimbursement rate

There are alternatives to the IRS mileage rate (or any other standardized rate). The most accurate approach is to separate fixed costs (insurance, depreciation, etc.) from variable costs (gas, tires, etc.) and reimburse each separately. This is called fixed and variable rate reimbursement (FAVR), and it has become the gold standard of auto reimbursement

To learn more about how you can save money with this alternative, contact mBurse today. 

IRS Rate v. FAVR - Calculate Savings

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