How do I determine the correct mileage rate for employee transportation in the US?

Determining the correct mileage rate for reimbursing employee transportation in the U.S. is more than a matter of referencing a single number. Federal standards, state-specific laws, tax implications, and business policy must be aligned to ensure legal compliance, financial efficiency, and fairness. This article outlines a comprehensive approach to navigating the mileage reimbursement landscape in the United States, focusing on both federal regulations and notable state-by-state distinctions.

Start with the IRS Standard Mileage Rate

The first step is to reference the IRS standard mileage rate, which provides a baseline for non-taxable reimbursements. For 2025, the IRS has set this rate at $0.70 per mile for business travel, a 3-cent increase from 2024’s rate of $0.67 per mile. This rate is intended to cover costs such as fuel, maintenance, depreciation, and insurance.

Employers can reimburse employees at this rate or less without the reimbursement being considered taxable income. However, reimbursements exceeding the IRS standard must be reported as taxable wages unless structured through specific IRS-compliant programs like FAVR.

Understand IRS Compliance Requirements

To avoid triggering tax liabilities, reimbursements must be issued under an accountable plan. These plans require:

1. The expenses must be job-related.
2. Employees must substantiate the expenses (e.g., purpose of trip, dates, mileage).
3. Any excess reimbursement must be returned to the employer within a reasonable timeframe, usually 30 days.

Failure to meet these criteria classifies the payments as non-accountable, thus subject to income and payroll taxes.

Recognize That State Laws Vary Significantly

While the IRS provides a federal benchmark, states have the authority to set their own regulations—or opt not to. This variance requires employers to tailor their mileage reimbursement approach to state-specific legislation where their employees operate.

Mandatory Reimbursement States

Some states mandate reimbursement for mileage used for business purposes:

• California, Illinois, and Massachusetts require employers to reimburse all necessary expenditures incurred during employment, including vehicle-related expenses.
• In Illinois, reimbursements must be processed within 30 days unless otherwise stipulated in writing, with penalties reaching up to 5% of the owed amount for each month of delay.

Voluntary Reimbursement States

Other states, including Florida, New York, Texas, and Ohio, do not mandate mileage reimbursement in the private sector, though it remains a best practice for employee retention and fairness.

In these states, businesses often adopt the IRS standard rate or use alternative models like FAVR to offer tax-compliant reimbursement without legal obligation.

Select a Reimbursement Model: CPM vs. FAVR

The reimbursement method you choose also impacts the correct mileage rate.

Cents-Per-Mile (CPM)

Under the CPM model, employees are reimbursed based on actual mileage multiplied by the IRS standard rate. This method is simple to administer and works well for occasional drivers. However, it can lead to overcompensation for high-mileage drivers and undercompensation for low-mileage ones.

Fixed and Variable Rate (FAVR)

The FAVR model allows more accurate reimbursements by splitting payments into fixed costs (e.g., insurance, depreciation) and variable costs (e.g., fuel, maintenance). It requires that at least five employees drive over 5,000 business miles annually, with vehicle MSRP under a capped limit—$61,200 for 2025.

FAVR reimbursements can legally exceed the IRS rate if structured correctly and remain tax-free, making it ideal for businesses with diverse driver profiles and substantial mileage variance.

Factor in Local Cost of Living and Industry Norms

Cost-of-living and mileage expectations vary significantly between states, impacting how far a standard reimbursement rate will stretch.

• In Florida, individuals spend about $5,000 annually on transportation, while families may spend up to $15,000.
• Ohio reports average monthly reimbursements near $630—well above the national average of $600—driven by manufacturing and logistics sectors.

Employers must consider these regional differences when setting policies, especially if operating in multiple states.

Use Technology to Improve Accuracy and Compliance

Regardless of the reimbursement model, accurate mileage tracking is crucial. Manual logs are increasingly replaced by automated apps like Cardata Mobile, which integrate with cloud systems to track mileage, generate reports, and ensure IRS compliance.

Employers save administrative time while reducing compliance risks. For example, Cardata users collectively save over 4,000 hours annually by automating mileage entry and reimbursement.

Ensure Fairness Through Transparent Policies

Companies should maintain transparent, well-communicated policies that detail:

• Eligible travel activities.
• How to track and submit mileage.
• Deadlines for reporting.
• Documentation requirements (e.g., odometer readings, business purpose).

This clarity supports tax compliance and ensures employee trust, particularly in decentralized or remote-first work environments.

Reassess Regularly to Account for Economic Change

With inflation and fuel prices fluctuating, businesses must periodically reassess reimbursement rates to ensure fairness and competitiveness. For instance, the IRS rate increased by 4.5% from 2023 to 2024, reflecting higher vehicle operation costs.

Failing to keep pace with economic realities risks under-compensating employees and reducing morale or retention.

Conclusion

Determining the correct mileage reimbursement rate in the U.S. requires more than just consulting the IRS. Businesses must integrate federal guidelines with state-specific laws, reimbursement models, local costs, and technological tools. A compliant, fair, and well-documented mileage policy not only reduces tax liabilities but also strengthens employee satisfaction and operational efficiency.

For organizations managing transportation across multiple states or employing a range of driver types, hybrid approaches combining CPM and FAVR may offer the best of both worlds—simplicity and equity.

Ultimately, mileage reimbursement is both a regulatory obligation in some states and a strategic advantage everywhere. Get it wrong, and you risk fines or morale loss. Get it right, and you optimize costs while empowering your workforce.

Disclaimer:

The content provided in this blog is for informational purposes only and is not intended as legal, financial, or tax advice. While every effort has been made to ensure the accuracy and reliability of the information at the time of writing, Cardata and the author assume no responsibility for any errors or omissions. Readers should consult with a qualified professional to determine how any information discussed may apply to their specific circumstances.