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.
Why do businesses use the IRS mileage rate for reimbursements
The IRS business mileage reimbursement rate has become the de facto national mileage rate. Initially designed for taxpayers to deduct business mileage, the IRS mileage rate has become so much more. Because the IRS has set
For many organizations, accurate mileage reimbursement is not a priority. Finding the easiest solution is. But that ease carries a price. The IRS tax deduction rate is based on national averages, not localized travel costs like the IRS-approved FAVR reimbursement.
What is the 2025 IRS business mileage rate?
The 2025 IRS business mileage rate is $0.70/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 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 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? The first driver may pay $5.220/gallon for gas and $220/month for auto insurance (depending on coverage), while the second pays only $3.50/gallon and $180/month for insurance (depending on coverage).
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 reimbursement for mileage lies in 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 you drive beyond the average mileage for a U.S. driver, the more the federal mileage rate overpays. At $.70/per mile, the federal mileage rate gets expensive quickly.
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 negligibly lower than the fixed costs 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 will not likely 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 driving costs 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 unfair situation between employees and an unsustainable expense for employers.
The best alternative to mileage reimbursement
Alternatives exist to the IRS mileage rate and other standardized rates. 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), which has become the gold standard of vehicle reimbursement.
To learn more about saving money with this alternative, contact mBurse today.
