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.
If you have looked this up before and written the number down, the number is probably wrong. The federal business mileage rate changed partway through the current year, which is rare enough that a lot of published guidance, and most internal policies, are still quoting the January figure. It is the first number I would tell another founder to check.
This guide starts with that rate, then covers 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.
That last distinction matters more than it looks. 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.
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 point both sides most often misunderstand is that the rate covers more than fuel. 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 Internal Revenue Service (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).
| 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 |
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 selects the rate, not the date the claim is paid. A claim covering late June and early July therefore correctly carries two rates on the same form, each matched to the days its miles were driven.
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, with two exceptions: 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 between the two on paperwork rather than 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. Other sources of obligation 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 and Illinois |
| 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 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, which in plain terms means repaying the necessary costs of doing the job (Labor Code 2802).
Illinois requires reimbursement of necessary expenditures incurred within the scope of employment (820 ILCS 115/9.5). Check your own state before writing the policy, because California and Illinois are not the only states with a general rule.
Massachusetts is narrower, with no general expense mandate. Its wage regulation requires transportation expenses to be reimbursed in two situations: an employee who normally works at a fixed site is told to report elsewhere, or any employee is sent from one place to another during the work day (454 CMR 27.04).
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
The three methods are the standard mileage rate, actual expenses, and a fixed and variable rate allowance. 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.
Eligibility conditions explain why the third method stays rare. Fixed and variable rate allowances must cover at least five employees at all times, and management employees may not make up a majority of them. Each covered employee must substantiate at least 5,000 business miles a year or 80 percent of projected business mileage, whichever is higher (Rev. Proc. 2019-46).
The calculation behind a fixed and variable rate allowance has limits too. Under the same revenue procedure, projected business mileage may not be set below 6,250 miles a year per employee. The standard automobile cost, meaning the price of the benchmark car the allowance is built on, may not exceed $61,700 for 2026 (Notice 2026-10).
The flat car allowance that many small businesses actually use is left out of the three on purpose, because it is not a reimbursement method at all. 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.
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 related 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. An assignment realistically expected to last a year or less also keeps the employee's tax home, meaning their regular place of business for tax purposes, 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 settling it report by report.
What the Log Actually Needs
Substantiation, the record that backs up each trip, is what makes the payment tax free, and it is four fields rather than a form: date, destination, business purpose, and miles. 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, in other words reporting the expense back, 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).
Timing is what gives the log its weight. Filled in trip by trip, it 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.
Dwight SchruteSales3 people
Darryl PhilbinWarehouse1 person
Kelly KapoorCustomer Service1 personThe 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.
| A | B | C | D | E | F | G | H | |
|---|---|---|---|---|---|---|---|---|
| 1 | Date of trip | Start point | Destination | Business purpose (who you saw, what for) | Business miles | Rate in force on that date, per mile | Amount claimed | Personal miles on the same trip, excluded |
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| 13 |
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 tool 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.
| 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).
A taxable mileage payment is still a cash payment, so it runs through payroll as ordinary wages on the W-2. It is not imputed income, which is what personal use of a company car creates.
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. 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
Small employers tend to get mileage wrong in five ways, 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.
Ignoring the minimum wage interaction comes last, and it 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.
Nick Anisimov, FirstHR founder
Frequently Asked Questions
What is the current IRS mileage rate?
For 2026 the business standard mileage rate comes in two periods: 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. The second figure is the result of an off-cycle adjustment the IRS made in response to fuel prices. The medical rate moved on the same date, from 20.5 cents to 23.5 cents, while the charitable rate is fixed by statute at 14 cents and did not move at all. In practice, one claim that covers driving in both June and July is paid at two different rates. Match each trip to the rate for its own date, because the day you process the payment has no bearing on which rate applies.
Is mileage reimbursement required by law?
There is no general federal requirement for a private employer to reimburse business mileage, but two things qualify that answer. The first is state law. Several states, including California and Illinois, require employers to reimburse necessary business expenses, which reaches mileage in practice. Massachusetts is a narrower case: there is no general expense statute, but a state wage regulation makes employers cover transportation costs when someone is sent away from their usual site or between locations within the work day. The second is federal wage law, under which unreimbursed business expenses cannot effectively push an employee’s pay below the minimum wage. That creates an indirect obligation for lower-paid roles even in states with no express reimbursement rule. Check your own state rather than assuming the federal answer settles the question.
Does mileage reimbursement have to be at the IRS rate?
No. The federal rate caps the per-mile amount you can pay tax free, but it is not an amount you are required to pay. Paying less is lawful under federal rules. It can still fall short in a state that requires employers to cover necessary business expenses, because leaving an employee out of pocket for a necessary cost is exactly what those statutes are written to prevent. Paying more is allowed too, and the part above the rate becomes taxable wages subject to withholding and payroll taxes. Employers generally settle on the federal rate itself because it is simple to administer and entirely tax free for both the business and the employee.
Is commuting reimbursable?
No. The drive between home and an employee’s regular workplace is a personal commute, not business travel, so paying for it is taxable compensation rather than an expense reimbursement. Driving done as part of the working day is different: a trip from one work site to another is business mileage, and so is a run from the office out to a client and back. In some circumstances, a drive from home straight to a temporary work location counts as well. For a temporary assignment, the one-year mark decides it: work realistically expected to last a year or less leaves the employee’s tax home where it was, while an indefinite assignment moves it. Since these edges turn on the facts, the safest policy spells out the commute exclusion and settles the rest case by case.
Is mileage reimbursement taxable to the employee?
No, as long as the payment runs through an accountable plan, stays at or under the federal rate, and covers business miles the employee has substantiated. When one of those slips, some or all of the money turns into wages. Paying above the applicable rate makes the excess taxable. Miles that were never substantiated with date, destination, purpose, and distance make the payment taxable, and so does an arrangement that fails the accountable plan conditions in some other way. Substantiation means the employee accounts to you for the time, the place, and the business purpose of each trip, not just a total number of miles at the end of the month. Anything that ends up taxable runs through payroll as ordinary compensation and is reported 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. The dividing line is how the money is calculated: an allowance paid per mile, at no more than the federal rate and against substantiated miles, stays outside wages; a round monthly figure paid whether or not anybody drove does not.
What records does an employee need to keep?
Four fields per trip: the date, the destination, the business purpose, and the miles driven. Those entries are the substantiation an accountable plan requires, and they belong in the log on the day of the trip or close to it, not pieced together later. The format is up to you, since an app, a spreadsheet, and a paper notebook all work. What counts is the timing and the purpose entry, which is the field people tend to leave blank and the one that actually shows the drive was for work. File the completed log with the payroll records rather than on an employee’s own device, because employment tax records have to be kept for at least four years after that year’s fourth-quarter return is filed.
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. The cleaner arrangement is one treatment per vehicle, written into the policy before the first claim is submitted, because unwinding a duplicate payment afterward means correcting wages rather than editing a spreadsheet. Parking and tolls the employee pays personally on a business trip stay reimbursable whichever car is used, because the per-mile rate was never meant to cover them.
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