Mileage Reimbursement: Rates, Rules, and Requirements
Mileage reimbursement pays employees for business driving. The current IRS rate, the accountable plan rules, and the states that require it.
Mileage Reimbursement
What you owe an employee who drives their own car for work: the federal rate and the mid-year change most published guidance has not caught up with, the three methods and why two of them are wrong for a small business, the states that make reimbursement compulsory, and the four-field log that keeps the payment out of taxable wages
If you have looked this up before and written the number down, the number is probably wrong. The federal business mileage rate changed part way through the current year, which happens rarely enough that a lot of published guidance, and most internal policies, are still quoting the January figure.
That is the immediate thing. The structural thing is that mileage reimbursement is one of the few payroll payments where getting the mechanics slightly wrong converts a tax-free reimbursement into taxable wages, and the mechanics are four fields on a form.
This covers the current rate and the mid-year split, whether you are required to reimburse at all, the three methods and why two are wrong for a small business, and where the line falls between a reimbursement and compensation. I build the people and records tooling for businesses without an HR department at FirstHR, and FirstHR is an onboarding and HR platform rather than a payroll provider. This is general information, not tax advice.
What Mileage Reimbursement Is
Mileage reimbursement is a payment covering an employee's cost of using their own vehicle for business. Paid correctly it is a reimbursement rather than pay, which means no income tax, no withholding, and no payroll tax on either side.
The rate covering more than fuel is the point most often misunderstood on both sides. An employee comparing the rate to what they spent at the pump concludes they are being overpaid; an employer doing the same arithmetic concludes the rate is inflated. Both are ignoring depreciation, insurance, tyres, and servicing, which is most of what the number represents.
The Current Rate, and the Change Nobody Caught
The IRS sets the business standard mileage rate annually and, occasionally, adjusts it during the year. For 2026 it did both.
| Period | Business rate | Medical and moving | Charitable |
|---|---|---|---|
| January 1 to June 30, 2026 | 72.5 cents | 20.5 cents | 14 cents |
| July 1 to December 31, 2026 | 76 cents | 23.5 cents | 14 cents |
| Calendar year 2025 | 70 cents | 21 cents | 14 cents |
The mid-year increase was an off-cycle adjustment responding to fuel prices, which is unusual: most years carry a single rate throughout (Internal Revenue Service). The rate that applies is the one in force when the miles were driven, which means a claim covering late June and early July correctly contains two rates on the same form.
Is Reimbursement Required?
Not by any general federal rule. A private employer is not federally obliged to reimburse business mileage at all, and where it does reimburse it is not obliged to use the federal rate. Two qualifications change that answer for a lot of businesses.
| Source of obligation | What it requires | Who it reaches |
|---|---|---|
| Federal law generally | Nothing specific on mileage | All private employers |
| State expense reimbursement statutes | Reimbursement of necessary business expenses | Employers in states including California, Illinois, and Massachusetts |
| Federal minimum wage rules | Expenses cannot effectively cut pay below the minimum wage | Any employer with lower-paid employees who drive |
| Employment contract or handbook | Whatever you promised | Anyone who wrote a policy and then departed from it |
| Collective agreements | Whatever was negotiated | Where applicable |
The third row is the one small employers overlook, and it applies in every state. Where an employee bears business costs out of pocket, those costs cannot in effect reduce their pay below the statutory minimum, which is the principle behind the rule that wages must be paid free and clear (29 CFR 531.35). For a delivery driver near the wage floor, unreimbursed mileage can create a genuine violation.
The fourth row is self-inflicted. A handbook promising reimbursement creates an obligation whatever the underlying law says, and departing from your own written policy is a straightforward dispute rather than a legal question.
The Three Methods
Three approaches exist and for a small business the choice is usually made in a sentence, because two of them are built for circumstances a small employer does not have.
The standard mileage rate wins for almost everyone because it collapses the entire problem into one multiplication. Nobody tracks insurance premiums, nobody apportions depreciation, and the employee needs to record four things per trip.
The flat car allowance that many small businesses actually use is not on that list, and that is deliberate. Paid as a fixed monthly amount without substantiated mileage it is compensation, taxed as wages on both sides. It feels simpler and it costs more.
Calculating a Payment
The arithmetic is business miles multiplied by the rate in force for the period the miles were driven. The only complication in the current year is the changeover.
| Scenario | Calculation | Result |
|---|---|---|
| 220 business miles in May | 220 × $0.725 | $159.50 |
| 220 business miles in September | 220 × $0.76 | $167.20 |
| 120 miles in June plus 100 in July | (120 × $0.725) + (100 × $0.76) | $163.00 |
| A 40-mile round trip that included a 6-mile personal detour | 34 business miles × the applicable rate | The detour is not reimbursable |
| Home to office and back, 30 miles | Not reimbursable | Commuting is personal travel |
The third row is the one to get right this year. Splitting a claim across the rate change is correct rather than pedantic, and an expense tool applying a single rate to the whole period will either overpay the first half or underpay the second.
The Commute Exclusion
Travel between home and the regular workplace is personal, and reimbursing it is compensation rather than an expense payment. This produces more awkward conversations than any other part of the topic, because from the employee's point of view the driving was unquestionably caused by the job.
Several adjacent trips are business miles and it is worth stating them explicitly so the exclusion does not swallow legitimate claims. Driving between two work locations during the day counts. Driving from the office to a client and back counts. Driving from home directly to a temporary work location, rather than to the regular one, generally counts, and the treatment there depends on facts including how long the assignment lasts.
The mixed trip is the practical edge. Somebody who visits a client and stops at the supermarket on the way back has driven business miles and personal miles in one journey, and only the business portion is reimbursable. A policy that says so, once, in one sentence, is worth more than adjudicating it per report.
What the Log Actually Needs
Substantiation is what makes the payment tax free, and it is four fields rather than a form. Everything else people build around mileage is optional.
Contemporaneity is the part that carries weight. A log filled in trip by trip is evidence; a reconstruction assembled in December from a calendar and a memory is an estimate, and it is also considerably more work for whoever has to do it.
Whatever collects it, the record belongs with the rest of the employee file rather than in a personal spreadsheet on somebody's laptop. That is the part FirstHR is built to carry, and it is what makes an expense query eighteen months later a lookup rather than an argument.
When It Becomes Taxable
Mileage paid under an accountable plan at or below the federal rate against substantiated miles is not wages. Three departures from that make some or all of it taxable.
| Departure | What is taxable | The fix |
|---|---|---|
| Paying above the federal rate | The excess only | Reimburse at the published rate, or accept the excess as a wage cost |
| No substantiation of the miles | The whole payment | The four-field log, recorded near the time |
| A flat allowance with no mileage record | The whole payment | Convert to per-mile reimbursement against a log |
| Reimbursing a commute | That portion | State the exclusion in the policy |
| Reimbursing miles on a company car | That portion | Company vehicles raise imputed income instead |
The accountable plan conditions that sit underneath all of this are the same three that govern travel allowances generally: a business connection, substantiation within a reasonable time, and return of any excess (26 CFR 1.62-2). Where an amount is taxable it runs through payroll as ordinary compensation and appears on the W-2 as imputed income.
Setting a Policy
A mileage policy for a small business is six lines. What matters is that the rate is referenced rather than reproduced.
Where Small Employers Get This Wrong
Five patterns, and the first is specific to this year.
Running the whole year at the January rate is first. The rate changed on July 1, and an expense tool with one number in it is now producing wrong figures in one direction or the other.
Paying a flat car allowance is second. It is taxable in full, it costs both sides more than the same money paid per mile, and it is chosen because it looks simpler on the day it is set up.
Reimbursing without a log is third. The payment can be entirely reasonable and entirely correct in amount and still be taxable, because substantiation is what makes it a reimbursement rather than pay.
Reimbursing the commute is fourth. It is sympathetic, it is common, and it is compensation.
And ignoring the minimum wage interaction is last, which is the one with a real legal edge on it. For lower-paid employees who drive, unreimbursed business costs that effectively push pay below the floor are a wage violation rather than a policy choice, whatever your state says about reimbursement generally.
Frequently Asked Questions
What is the current IRS mileage rate?
For 2026 the business standard mileage rate is set in two periods. It is 72.5 cents per mile for miles driven from January 1 through June 30, and 76 cents per mile from July 1 through December 31, following an off-cycle adjustment the IRS made in response to fuel prices. That split matters operationally, because a single expense report covering the changeover legitimately contains two different rates. The rate that applies is the one in force when the miles were driven, not when the claim is paid.
Is mileage reimbursement required by law?
There is no general federal requirement for a private employer to reimburse business mileage. Two things qualify that. Several states, including California, Illinois, and Massachusetts, require employers to reimburse necessary business expenses, which reaches mileage in practice. And under federal wage law, unreimbursed business expenses cannot effectively push an employee’s pay below the minimum wage, which creates an indirect obligation for lower-paid roles even in states with no express reimbursement rule.
Does mileage reimbursement have to be at the IRS rate?
No. The federal rate is a ceiling for tax-free treatment rather than a mandated amount. An employer may reimburse below it, which is lawful federally though it may fall short of a state requirement to cover necessary expenses, and may reimburse above it, in which case the excess is taxable wages subject to withholding and payroll taxes. Most employers use the federal rate precisely because it is the amount that is both simple to administer and entirely tax free on both sides.
Is commuting reimbursable?
No. Travel between home and the regular place of work is a personal commute, not business travel, and reimbursing it is taxable compensation rather than an expense reimbursement. Some related trips are business miles: driving between two work locations during the day, driving from the office to a client and back, and in some circumstances driving from home directly to a temporary work location. Because the edges are fact-specific, the safest policy states the commute exclusion plainly and handles the rest case by case.
Is mileage reimbursement taxable to the employee?
Not when it is paid under an accountable plan at or below the federal rate against substantiated business miles. It becomes taxable in three cases: where the amount paid exceeds the applicable rate, in which case the excess is wages, where the miles were never substantiated with date, destination, purpose, and distance, and where the arrangement fails the accountable plan conditions generally. Taxable amounts run through payroll as ordinary compensation and appear on the W-2.
Can I pay a flat car allowance instead?
You can, but it is a different thing with different tax treatment. A flat monthly allowance paid without substantiated business mileage is taxable compensation, subject to withholding and payroll taxes on both sides, which makes it materially more expensive than reimbursing the same amount of driving at the federal rate. It is simpler to administer, which is why it persists. If you want both simplicity and tax efficiency, a per-mile reimbursement against a short log is the combination that delivers it.
What records does an employee need to keep?
Four fields per trip: the date, the destination, the business purpose, and the miles driven. That is the substantiation an accountable plan requires, and it should be recorded at or near the time of the trip rather than reconstructed later. A mileage app, a spreadsheet, and a notebook are all acceptable; what matters is contemporaneity and the business purpose field, which is the one people leave blank and the one that actually establishes the trip was for work.
What if an employee uses a company car?
Then mileage reimbursement generally does not apply, because the employee is not bearing the vehicle costs. The issue reverses: personal use of a company vehicle is a taxable fringe benefit, and the value of that personal use has to be calculated and reported as imputed income on the employee’s W-2. Employers occasionally run both, reimbursing mileage on a company car, which double-counts the same cost and creates a taxable amount nobody intended.