An employer can reimburse an employee for using their vehicle for business purposes. Mileage reimbursement may be tax-exempt for the employer.
An employer can choose to reimburse by mileage allowance or by employee mileage reimbursement as described in the following sections.
An employer can choose to pay a monthly mileage allowance upfront. In case this is more than the employee’s actual expenses, the employee should return the excess.
The mileage allowance cannot be above the standard mileage rate set by the Internal Revenue Service (IRS) to be tax-free. The excess will be considered taxable income.
Employee mileage reimbursement
An employer can also choose to reimburse the employee’s mileage through the IRS mileage rate or through a Fixed and Variable Rate (FAVR) which will be described below.
However, you must opt for the standard mileage rate in the first year the car is available for business use. Leased vehicles must also use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen.
IRS standard mileage rate
This reimbursement covers all expenses linked to driving and owning a vehicle. You can find annual mileage rates set by the IRS here. Please note however, in recognition of recent gas price increases, the IRS has set a mid-year mileage rate at 62.5 cents per mile, applicable for the last 6 months of 2022. For 2023, the IRS has set the mileage rate at 65.5 cents per mile.
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rates may apply for cars, vans and trucks.
The employer can however choose to reimburse any amount, but if the amount is above the IRS standard mileage rate, the excess will be considered taxable income.
Fixed and Variable Rate (FAVR)
An employer can also choose to reimburse through a FAVR. This means the employer reimburses a fixed amount to cover fixed costs such as insurance and a per-mile rate to cover variable costs such as gas.
In case you use FAVR, you cannot use the IRS standard mileage rate. However, again if the amount is above the IRS standard mileage rate, the excess will be considered taxable income.
Additional notes on mileage allowance for business trips
- Everything in this section on mileage only applies to an employee undertaking a business trip with a personal vehicle. A business trip is considered to be a trip between two places of work, permanent or temporary. An example is travelling from your first workplace to client meetings. Commuting from home to work is not in the scope of this section. You can find more information on reimbursement of commuting expenses in the ‘Other Topics’ section where we explain more about fringe benefits.
- On the federal level, an employer is not required to provide a mileage reimbursement (Fair Labor Standards Act), but in some states it is obligatory.