Mileage Reimbursement Rules For Employers

Federal law does not generally require employers to reimburse employees for business-related driving, but implementing a well-structured mileage reimbursement program can offer significant benefits for both the business and its employees, from tax advantages to talent retention.

In this guide, we’ll cover mileage reimbursement rules, compliance requirements, and how to create an efficient program that works for your organization.

Legal requirements: Do you have to reimburse employees?

No explicit federal requirement exists to reimburse employees for business mileage. However, under the Fair Labor Standards Act (FLSA), employers must ensure that work-related expenses, including mileage, do not reduce an employee's pay below the federal minimum wage.

California, Illinois, and Massachusetts require employers to reimburse employees for necessary business expenses, including mileage. Other states may have varying requirements or regulations, so always consult your legal advisor or accountant to verify current laws in your specific state or locality.

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Business benefits of employee mileage reimbursement

Even though not legally required, implementing a mileage reimbursement program provides several advantages:

• Attract and retain talent: A fair reimbursement policy demonstrates that you value employees' contributions and could make your company more attractive to potential hires.
• Tax advantages: When structured under an IRS-compliant Accountable Plan, mileage reimbursements are tax-free for employees and tax-deductible business expenses for your company.
• Operational flexibility: For companies where maintaining a fleet isn't practical, allowing employees to use personal vehicles with proper reimbursement can be a cost-effective and flexible alternative.
• Employee financial protection: Since the Tax Cuts and Jobs Act of 2017, most employees can no longer deduct unreimbursed business expenses on their taxes. Reimbursing their mileage helps offset the actual costs they incur when they use their personal vehicle for business.

Reimbursement methods and rates

If you decide to reimburse your employee for mileage, you can choose between several methods:  

Standard Mileage Rate Method

Using the standard rate method, employees are reimbursed at a fixed rate per mile driven for business purposes. The 2025 IRS standard rate is 70 cents per mile. 

Pros: 

• Easy to administer
• Automatically covers all vehicle expenses (fuel, maintenance, depreciation)
• Non-taxable for employees when using the IRS rate
• Fully deductible for employers

As an employer, you can request that employees keep a record of the date, business purpose, starting/ending locations, and miles driven for each trip.

Car Allowance Method

This method provides employees a fixed monthly allowance to cover anticipated business driving costs, with periodic reconciliation based on actual mileage.

Pros: 

• Provides employees with upfront funds for expenses
• Works well for employees with consistent monthly mileage
• Helps employees manage cash flow for vehicle expenses

Cons 

• Requires end-of-period reconciliation
• Any excess over the calculated IRS standard rate amount becomes taxable income
• Additional administrative work to track and adjust allowances

FAVR (Fixed and Variable Rate) Method

Using the FAVR method, you’d reimburse employees through a combination of a fixed amount covering consistent costs (insurance, depreciation, registration) and a variable per-mile rate for fluctuating expenses (fuel, maintenance).

Pros: 

• More precisely matches the actual costs incurred
• Accounts for regional cost differences
• Can be more equitable for employees in different locations

Cons: 

• More complex to administer
• Requires regular updates to fixed and variable components
• Still must compare against IRS standard rate for tax purposes

Best practices for your employee reimbursement program

Most companies use apps for mileage tracking and the IRS standard mileage rate reimbursement method to adhere to mileage reimbursement rules.

This saves time for employees who no longer have to keep mileage logs manually, and it's the most straightforward solution administratively. It also avoids the inflation of mileage claims by employees while ensuring they receive the reimbursement they're entitled to.

Try an employee reimbursement program for teams

If you are a manager or an employee looking for a solution for your team, you can try our team option. This allows you to follow mileage reimbursement rules more efficiently and reduce your managers' and employees' workloads. Quickly review and validate your team’s reimbursement claims with easy workflows for submitting and approving mileage.

Please check out our guide on setting up a team and let us know if you have any additional questions.

How to make reimbursements tax deductible: IRS Accountable Plan requirements

To ensure your mileage reimbursements remain tax-deductible for your business and tax-free for employees, your program must qualify as an "Accountable Plan" under IRS guidelines. Here are the key requirements:

1. Business connection: Reimbursements must be for business-related driving only (commuting between home and work doesn't qualify)
2. Substantiation: All expenses must be adequately documented and accounted for
3. Return of excess: Any overpayment must be returned within a reasonable timeframe

Timeline requirements

The following timeline requirements are also part of an Accountable Plan: 

• Employees should document expenses within 60 days of the trip
• Reimbursement should be provided within 30 days of expense submission
• Any excess reimbursement must be returned within 120 days
• Provide quarterly statements for employees to account for outstanding advances

Record-keeping requirements

For Accountable Plan compliance, employees must maintain records that include:

• Business purpose: Clear description of why the trip was necessary
• Mileage details: Starting and ending odometer readings or total miles driven
• Dates: When each business trip occurred
• Destinations: Where the employee traveled to and from
• Timely recording: Documentation created at or near the time of travel (weekly is acceptable)

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