You don’t have to overpay to reimburse your employees – unless you’re paying the IRS standard mileage rate. With ease comes a price, but there are alternatives.
Quick Answer: Why Can the IRS Mileage Rate Overpay or Underpay Employees?
The IRS mileage rate can overpay or underpay employees because it is one national cents-per-mile rate. It does not adjust for each employee’s mileage level, location, insurance costs, fuel prices, maintenance, depreciation, or vehicle type.
High-mileage drivers may receive more than their actual business vehicle costs, while low-mileage drivers may not drive enough reimbursable miles to recover fixed costs such as insurance, registration, and depreciation. Employers should compare the IRS rate with actual employee driving patterns before assuming it is the fairest reimbursement method.
Why Do Businesses Use the IRS Mileage Rate for Reimbursement?
Businesses often use the IRS mileage rate because it is simple, widely recognized, and easy to apply across their workforce. A company can multiply approved business miles by the IRS rate and create a straightforward reimbursement calculation.
The problem is that simplicity does not always equal accuracy. The IRS mileage rate was created as a standard mileage rate for tax purposes, not as a customized vehicle reimbursement strategy for every employee. When employers use one national rate for every driver, reimbursement accuracy can vary widely.
What Is the 2026 IRS Business Mileage Rate?
For 2026, the IRS business mileage rate is 72.5 cents per mile for business miles driven January 1 through June 30 and 76 cents per mile for business miles driven July 1 through December 31.
Many employers use the IRS rate because it is simple, familiar, and easy to calculate. However, the IRS rate is a national benchmark, not a customized reimbursement model. Employers should apply the correct 2026 rate based on when the business miles were driven.
What expenses does the IRS rate mileage reimbursement cover?
What Expenses Does the IRS Mileage Rate Cover? Mileage reimbursement includes gas and a range of other expenses. These covered expenses include oil, tires, maintenance, insurance, depreciation, taxes, registration, and license fees. These expenses vary from driver to driver based on location and mileage.
Without a "standard" employee expense profile, there can be no "standard" mileage reimbursement rate. If you have employees in four different states, they will pay different amounts to own and operate their vehicles:
- Different gas prices and maintenance costs
- Different insurance premiums and depreciation amounts
- Different taxes and license/registration fees
Problems with a national reimbursement rate for mileage
Because employees in different locations experience different costs, a national mileage rate has limitations. This rate is based on national averages rather than localized costs.
Should a California employee receive the same mileage rate as a Virginia employee? For example, an employee in a high-cost market may pay more for fuel, insurance, repairs, taxes, or registration than an employee in a lower-cost market. A single national mileage rate may underpay one driver, pay another driver, and overpay a third driver depending on location, mileage, and vehicle cost assumptions.
The California driver may find that the rate underpays relative to costs. The same rate may perfectly fit the Virginia driver, or it may even overpay that driver. If you are the employer, how do you know whether that national rate fits your employees' situations?
Problems with cents-per-mile rates for reimbursement
Another problem with the IRS mileage reimbursement is the cents-per-mile structure. While simple and easy, paying a cents-per-mile reimbursement always risks overpaying and underpaying employees. Here are three reasons why:
The more miles, the more money
A generous cents-per-mile rate like the government rate encourages unproductive, unnecessary driving. Even worse, employees who self-report mileage are incentivized to exaggerate their mileage.
This is why pairing a reimbursement plan with an automated mileage tracking system is important. 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.
The more miles, the lower the cost-per-mile
Vehicle costs come in two forms: variable and fixed. Variable costs like fuel and maintenance increase with miles driven. Fixed vehicle costs include insurance, depreciation, and taxes. These costs do not track with increased mileage.
The more you drive, the less it costs to operate your vehicle per mile. This is because fixed costs do not increase much relative to mileage. However, the further an employee drives beyond average business mileage levels, the more a standard cents-per-mile rate can overpay. With the 2026 IRS business mileage rate split between 72.5 cents per mile and 76 cents per mile, reimbursement can add up quickly for high-mileage drivers.
The fewer miles, the higher the cost-per-mile
Similarly, the less an employee drives, the more likely a standard mileage rate will underpay. This is especially true of workers who drive well below the average mileage used to calculate the federal rate. Their fixed costs are only marginally lower than those of colleagues who drive more.
An employee who travels 2,000 miles per month will not incur double the costs of an employee who drives 1,000 miles. The 2000-mile driver exceeds the national average and is unlikely to incur $1,340 in monthly expenses.
Rate standardization for gas and mileage reimbursement
Rate standardization causes problems for reimbursements that require more than reactive policy changes. When an organization sees travel costs exceeding what is identified as a “manageable” expense, the typical response is to:
- Find a mileage tracker that holds employees accountable.
- Reduce the mileage rate for everyone.
- Re-establish commuter rules (i.e., clarify what counts as business travel).
The first will help decrease unproductive driving. However, none of these reactive steps get to the root of the problem—the standardized rate. Given the variations in mileage amounts and per-mile driving costs, does a standard rate make sense?
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 rate. This leads to an unfair situation between employees and an unsustainable expense for employers.
The Best Alternative to a Standard Mileage Rate
Employers that want a more accurate reimbursement method can evaluate Fixed and Variable Rate reimbursement, or FAVR.
FAVR separates fixed vehicle costs, such as insurance, depreciation, registration, and taxes, from variable operating costs, such as fuel, maintenance, tires, and mileage-based expenses. Because the reimbursement structure can account for mileage, location, and vehicle cost assumptions, it may reduce the overpayment and underpayment problems caused by a single national rate.
FAVR can also support tax-free reimbursement when IRS requirements are met and business mileage is properly documented.
FAQs About IRS Mileage Rate Overpayment and Underpayment
Why can the IRS mileage rate overpay employees?
The IRS mileage rate can overpay employees when high-mileage drivers receive the same cents-per-mile rate across a large number of miles, even though some vehicle costs do not increase with every mile driven.
Why can the IRS mileage rate underpay employees?
The IRS mileage rate can underpay employees when low-mileage drivers do not drive enough reimbursable miles to recover fixed vehicle costs such as insurance, depreciation, registration, and taxes.
Is the IRS mileage rate required for employee reimbursement?
In many states, private employers are not required to use the IRS mileage rate. However, employers should review state reimbursement laws, wage rules, company policies, and accountable-plan requirements before choosing a rate.
Is the IRS mileage rate tax-free?
Mileage reimbursement can generally be tax-free when it is tied to business use, paid under an accountable plan, supported by timely mileage records, and limited to substantiated expenses.
What is a better alternative to the IRS mileage rate?
Employers may consider a company-set mileage rate, actual expense reimbursement, or FAVR. FAVR may provide a more cost-specific approach because it separates fixed and variable vehicle costs.
How can employers tell if the IRS rate is overpaying or underpaying drivers?
Employers can compare reimbursement payments against employee mileage levels, locations, vehicle costs, insurance, fuel, maintenance, depreciation, and other business vehicle expenses.
Not sure whether the IRS mileage rate is overpaying some employees and underpaying others? mBurse can help you benchmark your current reimbursement program, compare actual driver costs, and evaluate alternatives such as FAVR to improve fairness, accuracy, and cost control.
