How Does Company Reimbursement for Mileage Work?

Company mileage reimbursement is a payment an employer makes to an employee for the business-related use of their personal vehicle. When employees drive their own car for work-related tasks, such as visiting clients or running business errands, they incur costs for fuel, maintenance, and general wear. Reimbursement is a separate payment from regular wages, designed to cover these operational expenses. The structure of a company’s reimbursement program is important, as it determines how payments are treated for tax purposes for both the employer and employee.

Reimbursement Methods and Rates

The most common method for calculating mileage reimbursement is the Internal Revenue Service (IRS) standard mileage rate. The IRS updates this rate based on studies of vehicle costs. For 2025, the business standard mileage rate is 70 cents per mile. This all-inclusive figure accounts for expenses like fuel, insurance, and depreciation, simplifying the process. To determine the payment, an employer multiplies the business miles driven by the standard rate.

An alternative is the Fixed and Variable Rate (FAVR) plan. This complex method more accurately reflects an employee’s vehicle expenses based on geographic location. A FAVR plan combines a fixed payment for costs like insurance and a variable per-mile rate for fuel and maintenance. While requiring more administration, it offers precise reimbursement for companies with staff in areas with different operating costs.

A third option is the actual expense method. Under this system, an employee tracks all specific costs of operating their vehicle for the year, including gas, repairs, and insurance. The percentage of business use is then applied to the total costs to determine the reimbursable amount. This method is burdensome for record-keeping and is less commonly used by employers.

It is important to distinguish between reimbursable business miles and non-reimbursable commuting miles. The travel from an employee’s home to their regular place of work is a personal commute and is not eligible for reimbursement. However, driving from the office to a client’s location, or from one work site to another, constitutes business mileage.

Tax Treatment of Reimbursements

The taxability of mileage reimbursements hinges on whether the employer’s program qualifies as an accountable plan under IRS regulations. An accountable plan is a reimbursement arrangement that meets three specific criteria. If a plan meets these requirements, the reimbursements are not considered income to the employee and are not subject to income or employment taxes. For the employer, these payments are deductible as a business expense.

First, the program must have a business connection, meaning the expenses being reimbursed are for legitimate, work-related activities. Second, the employee must provide adequate substantiation for their expenses to the employer within a reasonable period, often defined as within 60 days of when the expenses were incurred.

The third requirement is that the employee must return any excess reimbursement or allowance within a reasonable time, typically within 120 days. For example, if an employee receives a cash advance for a business trip but spends less than the advanced amount, they must return the difference to the employer.

If a reimbursement arrangement fails to meet one or more of these requirements, it is classified as a non-accountable plan. All payments are then considered taxable wages. The full reimbursement amount is added to the employee’s gross income on their Form W-2 and is subject to income, Social Security, and Medicare taxes.

Required Information for an Accountable Plan

To meet the substantiation requirement of an accountable plan, an employee must maintain a detailed and contemporaneous mileage log. These records can be kept in a physical logbook, a spreadsheet, or through a GPS-based mileage tracking application, which can automate much of the process.

The log must include the following for each trip:

• The date of travel.
• The total mileage driven.
• The destination or location of the travel.
• A clear business purpose for the trip, such as “Meeting with Jane Smith at ABC Corp” instead of just “business.”

These records must be created in a timely manner, meaning at or near the time the travel occurs. Recreating a log at the end of the year from memory is not compliant with IRS rules and can jeopardize the non-taxable status of the reimbursements.

Employees should also retain supporting documentation, such as receipts for tolls or parking fees. These expenses may be reimbursable separately from the mileage rate, depending on company policy.

Submitting a Reimbursement Request

The submission process for reimbursement varies by company, but most organizations require employees to submit their mileage log along with a formal expense report form. This report summarizes the total business miles driven for a specific period, such as a month or a quarter.

The employee calculates the total reimbursement amount by multiplying the total miles by the company’s reimbursement rate. The completed mileage log must be attached to this report as the substantiating documentation.

Many companies use digital systems, allowing employees to submit reports through an internal software portal or a dedicated expense management application. In other cases, the process may involve emailing the completed forms to a specific department, such as accounting or human resources. The timeframe for receiving payment can range from a few days to the next scheduled payroll cycle.