Determining Your Mileage Rate: A Practical Guide for Business Drivers

How much should I charge per mile for business driving?

The answer to this question lies at the intersection of tax compliance, operating costs, and fair employee compensation. With business driving being a staple in industries like sales, healthcare, construction, and logistics, setting the right mileage reimbursement rate is crucial for both companies and drivers.

IRS Standard Rate: The Baseline

In the United States, the Internal Revenue Service (IRS) establishes an annually adjusted standard mileage rate to reflect typical operating costs like fuel, maintenance, insurance, and depreciation. For 2025, the IRS set this rate at 70 cents per mile for business travel, which increased from 67 cents in 2024.

Using this rate provides a safe benchmark. Reimbursements at or below the IRS rate are tax-free to employees and do not incur additional payroll taxes for employers. It also simplifies compliance, as the IRS treats any amount within this limit as non-taxable under accountable plans.

Understanding the True Cost of Driving

Mileage reimbursement isn’t just about fuel. It should factor in a range of vehicle-related expenses. These include insurance, wear and tear, registration, licensing, and depreciation. In fact, the average annual maintenance cost for a vehicle in the U.S. is $792, while total ownership expenses—including depreciation—average $4,551 annually.

For employees who drive frequently for work, failing to properly account for these costs can result in under-compensation. Conversely, reimbursing too generously may trigger tax liabilities if the IRS deems payments excessive.

Regional Variations and Legal Requirements

State policies also influence what drivers can or should charge. Only a few states—Massachusetts, California, and Illinois—require employers to reimburse business-related mileage by law. In most other states, reimbursement is optional, though it’s considered a best practice.

For instance, in Illinois, the average mileage reimbursement exceeds the national average of $600 due to dense urban environments and heavy commuter traffic. Employers must reimburse for work-related vehicle use, excluding normal wear or commuting. Similarly, Massachusetts mandates reimbursement for all travel beyond the regular commute.

Other states like Florida and New York allow employers to adopt the IRS standard but don’t enforce reimbursement. Adhering to the federal rate in these states ensures reimbursements remain non-taxable, avoiding legal pitfalls.

Business Reimbursement Programs: CPM vs. FAVR

The most common reimbursement structures are Cents per Mile (CPM) and Fixed and Variable Rate (FAVR) programs.

CPM simply uses a flat per-mile rate—typically the IRS standard. It’s easy to implement but tends to favor high-mileage drivers and undercompensate those with lower mileage, as fixed vehicle costs remain constant regardless of distance driven.

FAVR, by contrast, combines a fixed monthly allowance (covering costs like insurance and depreciation) with a variable per-mile reimbursement (for fuel and maintenance). To qualify for a FAVR program, employers must have at least five drivers, each logging over 5,000 business miles annually. Vehicles must also cost less than $61,200, with personal cars being within 90% of this value.

The advantage of FAVR lies in precision. It customizes reimbursements to reflect actual vehicle costs in specific regions, ensuring fair and tax-free compensation. It also enables payments that exceed the IRS rate without triggering taxes, provided program compliance is maintained.

Blended Programs and Sector-Specific Rates

Hybrid approaches are gaining traction, especially among companies with diverse driving needs. For example, using FAVR for full-time field employees and CPM for occasional drivers creates a balanced reimbursement framework. This model is both tax-efficient and equitable, accommodating variable mileage patterns across departments.

Some industries even report sector-specific rates. In construction, monthly reimbursements can average between $0.28 and $0.29 per mile—lower than the IRS rate, yet aligned with industry benchmarks and vehicle types, and paired with a fixed allowance under a FAVR program.

Inflation and Rising Costs

The choice of mileage rate must also keep pace with inflation. From April 2021 to April 2022, new vehicle prices rose by over 22%, and used vehicles surged nearly 25%. Simultaneously, fuel prices and interest rates climbed, significantly increasing the total cost of vehicle ownership.

Traditional reimbursement methods like CPM may no longer reflect the real cost of driving. Businesses are encouraged to reassess rates annually and consider FAVR structures that adjust to market conditions, offering more sustainable compensation models amid rising costs.

Best Practices for Setting Your Rate

Whether you’re an individual freelancer, small business owner, or HR manager, selecting an appropriate per-mile charge requires a methodical approach:

1. Start with the IRS baseline: This ensures tax compliance and fairness.
2. Assess your actual costs: Use data on fuel, insurance, and maintenance to validate your rate.
3. Consider your region: Local gas prices, taxes, and vehicle requirements impact driving costs.
4. Review your mileage volume: High-mileage drivers may benefit from FAVR; low-mileage ones from CPM.
5. Account for compliance: Adhere to IRS accountable plan rules—document trip purposes, odometer readings, and submission timelines.

Employers should also involve finance, HR, and legal teams to ensure policies align with federal and state regulations and minimize exposure to taxable reimbursement risks.

Technology’s Role in Rate Accuracy

Modern mileage tracking tools play a critical role in both accuracy and administrative efficiency. Automated systems like GPS-enabled apps reduce errors, ensure IRS-compliant records, and can save employees up to 42 hours annually on mileage entry.

For employers, integrated reimbursement platforms simplify payment processing, generate audit-ready reports, and allow real-time rate adjustments based on updated costs.

Conclusion: Set a Fair, Data-Informed Rate

Charging the right per-mile rate is more than a guess—it’s a data-informed decision that balances tax compliance, cost recovery, and equitable treatment. By referencing the IRS standard, adjusting for local and industry conditions, and considering modern reimbursement models like FAVR, drivers and employers alike can implement rates that are both fair and financially sustainable.

In today’s dynamic economy, staying updated with cost trends, legal requirements, and reimbursement strategies isn’t just recommended—it’s essential for responsible vehicle-related compensation.