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

[Updated for 2024] 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 reimbursement of employees for business travel. What was originally designed for taxpayers to deduct business mileage has become the expected method of calculating employee reimbursements for travel.

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

IRS Rate v. FAVR - Calculate Savings

What is the 2024 IRS business mileage rate?

The 2024 IRS business mileage rate is $0.67/mile. If your organization uses this rate for business travel reimbursement, you need to ask 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? 

What expenses does the IRS rate mileage reimburse for?

Mileage reimbursement covers a range of vehicle expenses: gas, 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 personal vehicles:

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

Herein lies the problem. Should a California employee paying $5.00/gallon for gas and $220/month for auto insurance and a Virginia employee paying $3.50/gallon and $160/month for insurance receive the same mileage rate?

Why the IRS mileage rate overpays some workers (and underpays others)

Paying a cents-per-mile reimbursement, while simple and easy, always carries the risk of overpaying employees – especially at the federal mileage rate of 67 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 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. The further you drive beyond the average mileage for a U.S. driver, the more that $.67/mile rate overpays.

Similarly, 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. Their fixed costs are only negligibly lower than the fixed costs of colleagues who drive more.

An employee who travels 2000 miles per month will not incur double the costs of an employee who drives 1000 miles. The 2000-mile driver is well above the national average and will not likely incur $1,340 per month in vehicle expenses.

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

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

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

The first will be helpful in decreasing unproductive driving. But none of these reactionary steps gets to the root of the problem. The root of the problem is the standardized rate. Given the variations in mileage amounts and the costs of driving per mile, 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 inequitable situation between employees and an unsustainable expense for employers.

What is the best alternative to mileage reimbursement?

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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