Mileage Reimbursement: Rates, Rules, and Requirements

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, tires, 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, which is why the agency now publishes two business figures for the same calendar year (Internal Revenue Service).

According to IRS Announcement 2026-11, the mid-year increase was an off-cycle adjustment made in response to recent increases in the price of fuel (Internal Revenue Bulletin 2026-29). That is unusual: most years carry a single business rate from January to December.

The date of the trip is what selects the rate. A claim covering late June and early July correctly contains two rates on the same form, and the figure that applies is the one in force when the miles were driven rather than the one current when the claim is paid.

What Is the Standard Mileage Rate?

The standard mileage rate is the per-mile amount the IRS publishes for reimbursing or deducting business driving, and the business figure is set from an annual study of the fixed and variable costs of operating an automobile. That study is why the number moves at all, and why it sits so far above the price of fuel.

The medical and moving rate comes out of the same study but counts only the variable costs, which is why it lands at under a third of the business figure. The charitable rate is not a study output at all; it is fixed in statute, so it stays put while the other two move.

The moving half of that rate reaches almost nobody on a small business payroll. The moving expense deduction is permanently disallowed except for members of the Armed Forces on active duty moving under military orders and, for moves after December 31, 2025, certain members of the intelligence community (IRS Notice 2026-10). For a private employer the medical figure is the one that matters.

Using the rate is optional. The IRS allows the actual costs of running the vehicle to be calculated instead, which is the second of the three methods below and the one almost no small business should take on. Employers generally choose on paperwork rather than on arithmetic, and they choose correctly.

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. Three qualifications change that answer for a lot of businesses.

The second row is where most of the state answer lives. California requires an employer to indemnify an employee for all necessary expenditures or losses incurred in direct consequence of the discharge of their duties (Labor Code 2802), and Illinois requires reimbursement of necessary expenditures incurred within the scope of employment (820 ILCS 115/9.5).

Massachusetts arrives at a similar place by a narrower route. Its wage regulation requires reimbursement of transportation expenses whenever an employee who normally works at a fixed site is told to report somewhere else (454 CMR 27.04). Check your own state before writing the policy, because the list runs longer than these three states.

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 (29 CFR 531.35).

The principle underneath that rule is that wages must be paid free and clear, with nothing flowing back to the employer that pulls them under the floor. For a delivery driver paid near the minimum, unreimbursed mileage can create a genuine violation rather than a policy gap.

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 eligibility conditions on the third method explain why it stays rare. Under the federal safe harbor the standard automobile cost may not exceed $61,700 for 2026 (Notice 2026-10), and projected annual business mileage may not fall below 6,250 miles per employee (Rev. Proc. 2019-46).

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.

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.

Parking and tolls sit outside the rate entirely. The standard mileage figure covers the cost of operating the vehicle, so business parking fees and tolls an employee pays out of pocket are reimbursed on top of the per-mile amount rather than folded into it.

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 too.

Temporary work locations are where the line gets harder to draw. Driving from home directly to a temporary site, rather than to the regular one, generally counts, and an assignment realistically expected to last a year or less keeps the employee's tax home where it already was (IRS Publication 463).

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.

The federal rules put it in exactly those terms. An employee is treated as accounting to the employer once they substantiate the time, the place or use, and the business purpose of the travel, with the miles supplying the amount (Rev. Proc. 2019-46).

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.

The sheet below is the four fields with a rate column beside them, which is the version that survives a year where the rate moved. Give one to each employee who drives, and have them fill in the rate that was in force on the date of each trip rather than the rate on the day they submit.

Keep the completed log as long as you keep payroll records. Employment tax records are retained for at least four years after you file the fourth-quarter return for that year, and the mileage substantiation is part of what makes those payments defensible (Internal Revenue Service).

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. Five departures from that make some or all of it taxable.

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.

Company cars invert the question rather than answering it. Where the employer provides the vehicle the employee bears no ownership cost, so there is nothing to reimburse, and what arises instead is the value of any personal use of that vehicle, which is a taxable fringe benefit included in wages (IRS Publication 15-B).

Setting a Policy

A mileage policy for a small business is seven 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