Understanding Mileage Reimbursements and Rates

What Is Mileage Reimbursement?

Mileage reimbursement is a compensation process through which employees are reimbursed for using their personal vehicles during work-related activities, such as going to client meetings, training, and work-related shopping. Notably, it doesn’t include travel from home to a regular workplace.

The general idea of mileage reimbursements is to cover the employee’s car-related expenses including gas, maintenance, wear and tear, etc.

To make sure that costs are reimbursed fairly and in compliance with IRS requirements, both employees and employers are required to keep detailed records and proof of actual costs or vehicle usage (such as mileage logs or reports from a mileage tracking app like MileIQ), that justify the specific amount reimbursed. And, in the case of a Fixed and Variable Rate (FAVR) allowance or actual expenses method of reimbursement, all relevant receipts for repairs, tolls, tires, etc.

In most cases, companies use mileage-based methods for calculating reimbursement. However, there are a couple of options.

1. Standard mileage rate

This approach involves using standard mileage rates, which are set each year by the IRS. In addition to rates, the IRS also provides instructions on what type of travel is eligible for reimbursement.

2. Car allowance

Fixed allowance means paying employees a fixed sum for a given period, usually as a part of their salary. It also requires mileage tracking and reporting. Of course, the method is still subject to IRS regulations, which means that if the allowance exceeds the standard mileage rate, the additional sum has to be returned or taxed.

3. Fixed and variable rate (FAVR)

The Fixed and Variable Rate (FAVR) method combines a fixed monthly allowance for costs like insurance and registration and a variable rate that addresses variable costs such as fuel and maintenance. It’s designed to help businesses reimburse vehicle-related expenses more accurately.

What Are Mileage Rates?

Standard mileage rates are values the IRS sets for calculating reimbursable or deductible costs for driving a personal car for work-related reasons. There are three categories of travel that are eligible for mileage reimbursement:

• Self-employed and business
• Charities
• Medical and moving (same rate)

Traditionally, the IRS publishes new standard mileage rates for the next year in the middle of December.

Current IRS Mileage Rates

For 2024, new standard mileage rates set by the IRS are:

• 67 cents per mile for business-related travel
• 14 cents per mile for charity-related travel
• 21 cents per mile for medical and moving-related travel (note that moving mileage is only applicable to active duty military)

Each year, the IRS adjusts standard mileage rates to reflect changes in the economy and the many ever-changing costs of owning and maintaining a vehicle, such as fuel prices, insurance costs, inflation, market situation, and much more. These adjustments help ensure fair reimbursements that align with the current economic and market conditions.

For each category, there are IRS regulations that specify what type of travel exactly qualifies for tax deduction or reimbursement.

How to Calculate Mileage Reimbursements

The general formula for mileage reimbursement looks like this:

Reimbursement amount = mileage rate x business miles driven

However, it’s necessary to point out that mileage reimbursements for employees aren’t required by law on a federal level. They’re only mandatory in California, Massachusetts, and Illinois due to state regulations. In those states, companies usually use standard mileage rates to reimburse their employees.

So, if a person reported 150 business miles driven, the equation would look like this:

$100.50 = 67 cents x 150 business miles

In all the other states, companies can set any mileage rate policy according to their preferences. It can be both lower or higher than the standard mileage rate.

For example, if a company wants to appeal to its employees, it can set a higher mileage rate, but any amount exceeding the IRS rates will have to be reported as additional income and taxed.

Mileage Reimbursement Based on Fixed and Variable Costs

Mileage reimbursement based onFAVR offers a more tailored approach than the standard mileage rate.

This method considers both the fixed expenses (like insurance, taxes, and depreciation) and the variable costs (such as fuel and maintenance) associated with using a personal vehicle for business purposes.

FAVR is designed to provide a more accurate reimbursement by reflecting the actual vehicle operating costs. It’s particularly beneficial when vehicle expenses vary significantly, ensuring employees are compensated fairly and per the true costs of their business travel.

Historical Mileage Rates Set by the Internal Revenue Service

The standard mileage rates constantly change to reflect the economic situation, gas or insurance prices, and other car-related expenses.
‍

The most significant change in recent years was in 2022 due to economic factors, including fluctuating fuel prices and evolving vehicle operation costs — 2022 was also a unique year due to the mid-year revision by the IRS.

Historical mileage rates are influenced by fuel prices, inflation, vehicle depreciation, market conditions, employment trends, government policies, and consumer spending. Adjustments in mileage rates are a great indicator of the economic challenges of any given year in American history.

Tax Implications of Mileage Reimbursement

Understanding the tax implications of mileage reimbursements is crucial for both employees and employers. For employees, reimbursements at or below the IRS standard rate are not taxable. This means these amounts don't need to be included as income on tax returns.

However, employees can't additionally deduct unreimbursed travel expenses, so it's essential for them to ensure they receive reimbursement based on actual costs and vehicle usage.

For employers, mileage reimbursements given to employees are usually deductible as business expenses. This allows employers to reduce taxable income and ensure fair compensation for their employees' work-related vehicle use.

Mileage Rates for Different Non-Standard Vehicle Types

As of 2024, standard mileage rates that regulate tax-free employee reimbursements refer primarily to cars and other gasoline-powered vehicles, including vans, pickups, SUVs, etc.

The rate is the same for all those vehicles. It’s also the same in the case of electric and hybrid cars despite differences in maintenance and travel costs.

Vehicles that are not included are:

• Motorcycles or scooters
• Bicycles

Motorcycles are treated differently than cars due to their lower maintenance and fuel costs. As a result, the standard mileage rate does not apply, and any potential employee reimbursement would be considered taxable income.

‍

Mileage Rates in Different Countries

There are significant differences in mileage rates and reimbursement regulations between countries.

For example, in Canada, the rate for the first 5,000 kilometers is 70¢ and any kilometer after that is 60¢. There are also higher rates in different provinces, like Yukon and Nunavut.

In many parts of Europe, including Austria and Belgium, there are limits in terms of maximum mileage that can be reimbursed tax-free over a year.

The system in France is even more complicated as it specifies different rates based on the vehicle’s engine and three categories depending on the distance traveled.

As an employer, you must keep in mind local regulations and yearly updates to ensure full compliance when hiring internationally.

Mileage Rates for Different Purposes

Mileage rates used for reimbursements or tax deductions are different depending on the purpose of your travel: business, medical/moving, or charitable. Each category has specific rules that specify what type of travel can be considered business, medical, or charity-related.

Mileage rate for business purposes

• Business mileage rate for 2024: 67 cents per mile

The most common category includes all types of work-related travel, such as going to business meetings, work-related shopping, and client visits. The important exception is travel between home and regular workplace.

Mileage rate for medical or moving purposes

• Medical and moving mileage rate for 2024: 21 cents per mile

Medical-related travel includes visits to doctors, hospitals, and other healthcare providers.

According to the Tax Cuts and Jobs Act of 2017, for the years 2018-2025, moving-related travel expenses can be deducted only by active-duty military personnel changing their place of living resulting from a military order.

Mileage rate for charitable purposes

• Charitable mileage rate for 2024: 14 cents per mile

Travel related to charity work, volunteering, and providing services for qualified charitable organizations can be deducted. To be eligible, most organizations have to apply to the IRS. Churches and governments are automatically registered. You can check an organization’s eligibility on the IRS website.

How to Accurately Track Mileage?

Accurate mileage tracking is a necessary step to proper mileage reimbursements. You can do this manually or digitally.

Manual Tracking

This method requires maintaining a detailed log with dates, starting and ending locations, the purpose of each trip, and odometer readings. The method is straightforward and perfectly viable on a small scale, but it still requires consistent updating and is prone to human error.

Digital Tracking

Digital tools offer a more efficient way to track mileage. Apps like MileIQ simplify the process significantly with automatic mileage tracking and easy classification of each trip. On top of that, it can be integrated with accounting software, which further facilitates the entire process of mileage tracking and employee reimbursements.

Make Mileage Tracking and Reimbursements a Cakewalk

Mileage tracking and reporting can be pretty cumbersome. But it doesn’t have to be. By using simple tools like MileIQ, you can reduce the process to just a few clicks and not worry about incorrect rates or calculations.

Have more questions about mileage tracking, reporting, or reimbursements? You can find all the answers in our articles.

‍