What is mileage reimbursement?

Mileage reimbursement is compensation received by employees for using their personal vehicles during business-related tasks.

Reimbursing for mileage costs is an important business practice that helps both parties—employers keep a mobile workforce without the need for company-owned automobiles, and employees receive compensation for vehicle expenses such as fuel, maintenance, and wear and tear spent on the job.

U.S. mileage reimbursement rates for 2024

To establish fairness and clarity, the IRS has set a standard mileage rate for different travel types. As of 2024, the rates are:

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How do people track mileage?

Tracking mileage accurately is essential because it not only helps employees receive the correct compensation for their work-related driving, but it also helps businesses manage their budgets and comply with tax regulations.

Here are several effective ways to track your employees' mileage:

• Ask your employee to keep a notebook in the vehicle and note down the miles at the end of each business trip, along with the date and purpose.
• Create a digital spreadsheet to record trip details, including date, starting location, destination, purpose, and miles driven.
• Use a mileage tracking app that uses GPS to automatically log the trips.
• Install a dedicated GPS tracker in the vehicle to record all trips automatically.
• Provide your employees with pre-printed mileage log forms to help maintain their records.

Different forms of mileage reimbursement

Fixed-rate mileage reimbursement

The standard mileage rate is a predetermined rate per mile set by the IRS that taxpayers can use to compute deductible car expenses for business, charitable, medical, or moving purposes. 

Employers use it as a common benchmark to determine how much to repay employees for miles driven in their personal vehicles for work.

Plus, the convenience of applying this fixed rate is that it benefits businesses and employees by giving them a clear and uniform guideline. Furthermore, reimbursements at or below the IRS-approved rate are typically not taxable to the employee.

Please consult with a tax professional for additional guidance.

Variable-rate mileage reimbursement

The variable mileage rates take into account changes by industry or job type and may be adjusted for varying fuel costs and other relevant expenses.

For example, a construction company may charge a greater mileage rate than a typical office-based business due to more demanding travel requirements and the necessity for larger cars.

Although this pricing structure is more complicated, it can be more fair for employees who often drive in places with higher fuel prices or conditions that cause vehicle wear.

What is the formula for calculating mileage?

The formula for calculating mileage reimbursement under the cost-per-mile method is:

Reimbursement amount = Miles × Rate

Are mileage reimbursements tax deductible?

When it comes to the legal and tax implications of calculating mileage reimbursement, several parties, including employers, employees, and self-employed individuals, must be considered.

For instance, employers need to follow IRS requirements to appropriately reimburse their employees for business-related travel expenses. They should keep correct records and implement a fair and accountable plan.

And employees can get reimbursed for business travel costs that exceed their usual commuting expenses. To support their claims, employees should keep detailed records of their mileage and receipts. This helps ensure they follow the organization’s regulations.

Please consult with a tax professional for more guidance. 

How businesses use the IRS standard mileage rate to calculate reimbursements & tax deductions

The IRS standard mileage rate, updated annually, simplifies the process of accounting for vehicle expenses. Here's how businesses use this rate and some important considerations:

Business mileage vs. personal mileage

When using the IRS standard mileage rate, you must distinguish between business and personal miles. Business miles are those driven for work-related purposes, excluding commuting to and from your regular workplace. Personal miles, including your daily commute, are not eligible for reimbursement or tax deductions.

Mileage rates for non-standard vehicles

The IRS standard mileage rate applies to cars, vans, pickups, and panel trucks. So, businesses using non-standard vehicles may need to consider alternative methods:

• Large trucks or specialty vehicles: The standard rate may not adequately cover operating costs. So, consider using actual expenses instead.
• Electric vehicles: While the standard rate applies, you might find the actual expense method more beneficial due to lower fuel costs but potentially higher depreciation.
• Motorcycles: The IRS doesn't provide a standard rate for motorcycles. So, you can calculate a separate rate for these as they incur lower operating costs than other vehicles.

Calculate mileage reimbursement example

So, let’s look at how to calculate mileage reimbursement for employees, self-employed individuals, and for charity/medical purposes:

Calculate mileage reimbursement for employees

Suppose an employee drives 300 miles for business purposes using their vehicle. For 2024, the IRS standard mileage rate is 67 cents per mile. The reimbursement calculation would be:

Reimbursement amount = 300 miles × $0.67 = $201.00

In this case, the employee receives $201.00 to cover the costs associated with using their personal vehicle for business, including fuel, maintenance, and depreciation.

Calculate mileage reimbursement for a self-employed person

As a self-employed individual, you have two main options to calculate your mileage reimbursement for tax deductions:

Standard mileage rate method

This method is simpler and often preferred by many self-employed individuals. Let's say you drove 10,000 miles for business in 2024. The IRS standard mileage rate for 2024 is $0.67 per mile. So, your calculation would be:

10,000 miles x $0.67 = $6,700

Actual expenses method

This method requires more detailed record-keeping. Here's how it works:

• Track all expenses related to your vehicle use, including gas, oil changes, repairs, insurance, and depreciation.
• Calculate the percentage of your vehicle use that's for business.
• Apply that percentage to your total vehicle expenses.

Suppose your total vehicle expenses for the year were $8,000, and 75% of your vehicle use was for business. In this case, your reimbursement would be:

$8,000 x 75% = $6,000

Calculate mileage reimbursement for mixed business and personal travel

Suppose an employee uses their personal vehicle for both business and personal travel. In one month, the employee drives a total of 1,000 miles, with 600 miles for business purposes and 400 miles for personal travel. And since personal travel miles are not reimbursed, the employee’s reimbursement for business miles would be:

Reimbursement amount = 600 miles × $0.67 = $ 402.00

Calculate mileage reimbursement for charities

Suppose you volunteer for a local animal shelter, and during the year, you drive 500 miles using your personal vehicle to transport animals, attend events, and perform other services. 

The IRS mileage rate for charity-related driving is set at 14 cents per mile. In this scenario, your mileage reimbursement would be:

Reimbursement amount = 500 miles × $0.14 = $70.00

Calculate mileage reimbursement for medical or moving costs

Suppose you're driving 150 miles between cities to relocate for a job, or to get a medical test done. In both these cases, your standard mileage reimbursement would be: 

Reimbursement amount = 150 miles × $0.21 = $31.50

Mileage reimbursement vs. car allowance vs. FAVR

For businesses wanting to cut down on their travel & expense management costs, you can also look at some other ways to reimburse car-related expenses, such as:

Car allowance vs. mileage reimbursement

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A car allowance is a fixed amount added to your paycheck to cover vehicle expenses for work-related use. You receive this set sum each month, regardless of how much you drive for business purposes. This method is straightforward for employers to manage but is taxed as regular income.

Unlike car allowances, mileage reimbursement is tax-free. It more closely reflects your actual work-related driving expenses, but it may not cover all vehicle-related costs, such as insurance or depreciation.

FAVR vs. mileage reimbursement

Fixed and Variable Rate (FAVR) combines elements of both car allowance and mileage reimbursement. You receive a fixed amount for set costs like insurance and registration plus a variable rate based on the number of miles you drive for work.

For example, under FAVR reimbursement, the reimbursement rate will differ from one city to another, depending on fuel and other costs. Whereas, under mileage reimbursement, employees are paid as per the cents-per-mile concept. 

Car allowance vs. FAVR vs. mileage reimbursement

When choosing between these options, consider:

1. Your driving patterns for work
2. The complexity of administration you're willing to handle
3. Tax implications for both you and your employer
4. How accurately do you want expenses to be reflected in reimbursement

Your employer's preferences and policies will also play a role in determining which method is used. So, discuss the options with your employer to find the best fit for both parties, taking into account factors like driving frequency, vehicle costs, and administrative capabilities.

Conclusion: Simplify mileage reimbursement with Rho

Knowing how to calculate mileage reimbursement is crucial for firms that handle fieldwork or operations carried out by field personnel, like door-to-door sales or client site visits. 

To streamline this time-consuming process, Rho's employee mileage reimbursement feature allows you to automate the reimbursement calculation process.

To use the feature, enter key trip information such as the date and starting point of the trip along with the stops/destinations, as well as the end date.

After this, Rho is designed to automatically calculate your reimbursement amount based on the total miles of your trip and your organization's per-mile rate.

If you are a business looking to streamline your spending, increase your bottom line, and save hours of administrative time, sign up today to get started with Rho.

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.