How does mileage reimbursement work? A guide for employers

Rising gas prices and evolving travel behaviors are forcing businesses to rethink how they compensate employees for personal vehicle use. If you manage a distributed team or oversee employees who need to travel for their jobs, having a clear, adaptable mileage reimbursement policy is key to keeping travel costs in check—and keeping your employees happy.

In this guide, you’ll learn how mileage reimbursement works, how to calculate it fairly, and how to craft a flexible policy that reflects legal standards and real-world costs. 

What’s mileage reimbursement?

Mileage reimbursement is a system employers use to pay employees back for using their personal vehicles for work-related tasks. It typically covers costs like fuel, maintenance, and vehicle wear and tear.

Mileage reimbursement isn’t just a goodwill gesture—it’s a way to make sure your team doesn’t lose money on work errands, client visits, or inter-office travel. While rates vary, many businesses use the IRS mileage rate as a baseline.

Is mileage reimbursement tax-deductible?

Employers providing mileage reimbursement to employees or contractors can generally deduct these costs as business expenses, as long as the reimbursements are reasonable, well-documented, and meet IRS requirements. Self-employed workers can also deduct mileage based on either actual expenses or the standard rate (more on that below). 

For regular employees, the ability to deduct mileage and other unreimbursed business expenses on their federal tax return was eliminated by the Tax Cuts and Jobs Act of 2017. This means that if an employer does not reimburse an employee for business mileage, the employee generally cannot deduct those costs themselves, though this provision is scheduled to sunset at the end of 2025.

Federal mileage reimbursement laws

While no blanket federal law requires mileage reimbursement, there are exceptions. 

If an employee’s vehicle use causes their earnings to dip below minimum wage, employers that don’t reimburse may face penalties under the Fair Labor Standards Act (FLSA). That’s why many businesses offer mileage reimbursement even when it’s not strictly required.

States may also have their own reimbursement rules, which take precedence when they’re more generous than federal standards—for example, California, Illinois, and Massachusetts mandate mileage reimbursement under labor law.

How to calculate mileage reimbursement

Choosing the right reimbursement model depends on your workforce size and its driving patterns. You’ll also need to consider how much administrative oversight your team can manage. 

Here are some of the most common ways used to calculate mileage reimbursement. Whichever method you choose, make sure it’s consistent across your organization and documented in an easy-to-understand reimbursement policy.

Standard rate mileage reimbursement

The standard rate mileage reimbursement is the easiest and most widely used calculation method. For this type of reimbursement, multiply the miles driven for business by the IRS rate (for example, 70 cents per mile in 2025). 

This flat rate includes fuel, repairs, insurance, and depreciation, and it’s not usually taxable for employees. It's best for companies looking for a simple, standardized process requiring minimal individual expense tracking.

Example: 175 miles traveled x $0.70//mile = $122.50

Actual expense method

With the actual expense method, employees track all car-related expenses like gas, maintenance, oil changes, and even lease payments, then submit receipts for reimbursement. With this information, the business can reimburse the exact amount spent on work-related driving. 

The actual expense method works well when driving expenses vary widely or for employees who use their vehicles heavily for business travel. But since this method requires detailed record-keeping, it’s usually more time-consuming for both employees and employers.

Fixed and variable rate (FAVR)

FAVR plans reimburse employees based on two factors: fixed costs incurred (like insurance, registration, and depreciation) and variable costs (like gas and maintenance), which are adjusted based on geography and actual usage. 

This tailored approach benefits larger teams or organizations with frequent drivers in multiple regions because it accounts for location-based fluctuations in fuel prices and driving conditions.

5 tips to make a mileage reimbursement policy

Here are five tips for creating a mileage policy that’s fair and cost-effective.

1. Know the laws first

Start by understanding both federal and state laws. While reimbursement isn’t generally mandated under federal law, your policy must ensure that travel expenses don’t make employees’ net wages fall below minimum wage. Review your local labor laws, defaulting to the more employee-friendly guideline when in doubt—a policy that reflects fairness builds trust and lowers your legal risk.

2. Consider the driving area

Fuel prices fluctuate by region, and sometimes even by neighborhood. If your employees cover ground in a high-cost area or frequently burn fuel idling in heavy traffic, a one-size-fits-all reimbursement rate might not work for your company. Consider regional gas prices and average trip times, then adjust your rate or offer stipends to reflect what your employees are actually spending.

3. Use cost analysis tracking

If you want to optimize your mileage budget, start by having employees track their expenses. Mileage tracking apps and tools make it easy to log mileage, auto-classify trips, and upload receipts, simplifying compliance and reporting for everyone.

4. Let the data drive your mileage policy

Flat mileage rates may be easier, but they aren’t always the fairest or most economical solution—fuel prices, maintenance costs, and business needs can shift fast. To make sure your current mileage reimbursement rate is still working for your company, review the data quarterly (or more frequently), and be prepared to update your policy as needed. 

5. Use alternative solutions

Mileage reimbursement isn’t the only answer. In some cases, alternatives might make more sense, like offering company vehicles to frequent drivers, using corporate fuel cards with perks, or exploring train or air travel options when the cost of fuel is greater than the price of a plane ticket. A smart mix of solutions can reduce travel costs while keeping employees productive and comfortable.

Manage travel policies with Engine

A good reimbursement policy is only one part of the puzzle. To keep up with rising travel costs, your company needs to establish a strong travel policy and use smarter systems for managing everything from lodging to logistics.

‍Engine is one such system. From solo to group travel, Engine helps keep your team moving. No more juggling spreadsheets, manual approvals, or surprise expenses—just streamlined corporate travel that fits your budget and your team.