8 Essential Steps For Calculating Mileage Reimbursements

Employees driving their personal vehicles for work is common, but calculating mileage reimbursements correctly is anything but simple. 

Between IRS rules, changing mileage rates, regional cost differences, and multiple reimbursement options, it’s easy for businesses to underpay drivers, overpay expenses, or create unnecessary tax and compliance risk. Getting it right matters, not just for cost control, but for fairness, employee satisfaction, and audit readiness.

This guide breaks down the 8 steps for calculating mileage reimbursements, from determining what driving qualifies for reimbursement to choosing the right program and staying compliant over time. 

How to Calculate Mileage Reimbursements

Whether you’re using a Cents Per Mile (CPM) program, a Fixed and Variable Rate (FAVR) plan, or a Tax-Free Car Allowance (TFCA), these steps will help you understand how mileage reimbursements are calculated, and how to do it accurately, consistently, and in line with IRS requirements.

Step 1: Determine What Driving Qualifies for Reimbursement

Mileage reimbursements apply when employees use their personal vehicles for business purposes. 

Business mileage typically includes activities such as client visits, job site travel, pick-ups, deliveries, and attending off-site meetings or conferences. Personal driving, including commuting from home to work or from work to home, does not usually qualify for mileage reimbursement. 

Clearly separating business mileage from personal mileage is the foundation of an accurate and compliant reimbursement calculation.

Step 2: Choose the Right Reimbursement Method

The reimbursement method you choose determines how mileage costs are calculated and paid.

One option is the IRS standard mileage rate, which is commonly used in Cents Per Mile (CPM) programs. This rate is set annually by the IRS to reflect average driving costs.

With CPM reimbursement, employees are reimbursed a set amount for every business mile driven, usually based on the IRS standard mileage rate.

Another option is a Fixed and Variable Rate (FAVR) program. FAVR reimburses employees for both fixed expenses, such as insurance and depreciation, and variable expenses that change based on miles driven.

You can also consider a Tax-Free Car Allowance (TFCA). Under TFCA, employers set either a fixed reimbursement amount, a variable reimbursement rate per mile, or a combination of both. As long as the total payment doesn’t exceed what the employee would receive if reimbursed at the IRS standard mileage rate times their business miles, the entire amount can remain tax-free.

Step 3: Understand the Cost Components Behind Mileage Rates

Mileage rates are built from the real costs of operating a vehicle. These costs include fuel, oil, maintenance, repairs, and tires, as well as insurance, depreciation, license and registration fees, and personal property taxes.

Location matters because gas prices, insurance rates, taxes, and registration fees vary by state and region. Vehicle type also matters, which is why FAVR programs rely on a company standard vehicle when calculating reimbursements.

Understanding these components is especially important for FAVR programs, which calculate reimbursements based on actual cost data rather than a single national average rate.

Step 4: Apply the Correct Mileage Rate

In CPM programs, the mileage rate is typically the IRS standard mileage rate, which changes annually to reflect shifting driving costs. For example, in 2025, the IRS standard rate was $0.70 per mile.

In FAVR programs, the rate is customized. Fixed and variable costs are calculated separately using current, region-specific data and then combined into a total reimbursement.

Tax-Free Car Allowance programs are flexible. Reimbursements may be fixed, variable, or a combination of both, but they must stay below the IRS standard mileage rate to remain tax-free. Any reimbursement above that threshold becomes taxable.

Step 5: Track Mileage Accurately

Accurate mileage tracking is the key to calculating reimbursements correctly, and maintaining IRS compliance. Your drivers need to be able to document how many business miles they drove, and when those miles occurred.

Mileage can be tracked manually or with automated mileage tracking apps. Whichever method you choose, just be sure that records clearly distinguish business mileage from personal use. Proper documentation supports tax-free treatment and helps protect employers during audits.

Step 6: Calculate the Reimbursement Amount

At its simplest, mileage reimbursement is calculated using the following formula: Business miles × reimbursement rate = reimbursement amount

CPM Reimbursement Example

In a CPM program, multiply the employee’s monthly business miles by the IRS rate.

For example, if an employee drove 525 business miles in September 2025:

525 miles × 70¢  = $367.50 mileage reimbursement

FAVR Reimbursement Calculation

FAVR reimbursements are calculated by combining fixed and variable expenses.

Fixed expenses include:

• License and registration fees
• Depreciation of the company standard vehicle
• Personal property taxes
• State-specific insurance rates

These costs are added together to determine annual fixed expenses, which are then divided by 12 to calculate a monthly fixed reimbursement.

Variable expenses include:

• Gas
• Oil
• Maintenance
• Tires

Each variable cost is converted into a per-mile rate. For example, if oil costs $20 and lasts 5,000 miles, the cost is 0.4¢ per mile. After calculating each variable expense, they are combined into a single per-mile rate. 

To calculate total monthly reimbursement, add the monthly fixed amount to the variable mileage reimbursement.

Example:

• $1,200 annual fixed expenses ÷ 12 = $100 monthly fixed
• 20¢ per mile × 2,800 miles = $560 variable
• $560 + $100 = $660 total monthly reimbursement

Tax-Free Car Allowance Calculations

TFCA reimbursements vary by program design, but a variable TFCA is similar to a CPM calculation, and a combined TFCA is similar to a FAVR calculation. 

Some employers choose a flat monthly amount, such as $700, and justify the expenses according to IRS policy so the allowance remains tax-free.

Step 7: Ensure Tax and Compliance Requirements Are Met

To be tax-free, mileage reimbursements have to follow IRS accountable plan rules. Reimbursements that exceed the IRS standard mileage rate, or don’t have proper documentation, can be treated as taxable income.

Here are the key tax and compliance requirements for tax-free vehicle reimbursement programs, specifically for FAVR and Tax-Free Car Allowance (TFCA):

FAVR compliance requirements:

• Minimum 5 drivers on the program.
• Employees must drive at least 5,000 business miles per year (prorated if less than a year).
• Vehicle insurance coverage must meet or exceed company standards.
• Vehicle age must not exceed the retention cycle set by the company (typically 3-7 years).
• Vehicle cost compliance: The vehicle’s MSRP when new must be at least 90% of the assigned FAVR vehicle profile cost.
• Annual vehicle declaration including make, model, year, and odometer reading.
• Commute mileage must be deducted from reimbursement.
• Drivers must be full-time employees (FTEs).

Tax-Free Car Allowance compliance:

• Fewer compliance measures than FAVR.
• Requires proper mileage logging with business purpose and start/end addresses.
• Insurance verification is required.
• Employers pay tax only on allowance amounts exceeding the standard CPM rate.
• Drivers can use older or less expensive vehicles compared to FAVR.

Non-compliance can trigger an IRS tax test that compares reimbursements against the IRS standard mileage rate, with the amount exceeding the standard rate treated as taxable income. 

Step 8: Review and Adjust Over Time

Driving costs are not static. Fuel prices fluctuate, insurance rates change, and inflation and regional cost differences can significantly affect the true cost of operating a vehicle. 

Because of this, mileage reimbursement rates should be reviewed on a regular basis to ensure they continue to reflect real, current expenses and remain fair to both employees and the business. Relying on outdated assumptions can lead to under-reimbursement, employee dissatisfaction, or unnecessary overspending.

As organizations grow, add more drivers, or expand into new states or regions, their reimbursement programs often need to evolve as well. A solution that works for occasional or low-mileage drivers may no longer be appropriate for teams driving more than 5,000 business miles per year. 

Reviewing mileage patterns, geographic distribution, and program structure over time helps ensure the reimbursement approach continues to scale effectively, remain compliant, and align with changing business needs.

Why a Mileage Reimbursement Platform Simplifies the Entire Process

While it’s possible to calculate mileage reimbursements manually, doing so accurately and consistently takes significant time, data, and ongoing oversight. Rates must be kept current, regional cost differences must be accounted for, mileage must be tracked correctly, and documentation must meet IRS accountable plan requirements. 

As teams grow or operate across multiple locations, the complexity of doing these calculations manually compounds quickly. A mileage reimbursement platform simplifies this process by handling the heavy lifting for you. 

Instead of manually researching rates, tracking mileage, and recalculating reimbursements month after month, the platform automates calculations based on the correct reimbursement method, current cost data, and each driver’s actual business mileage. 

Fixed and variable expenses are applied, reimbursements stay within IRS limits, and records are maintained for compliance and audit readiness.

By working with a mileage reimbursement partner like Cardata, you can reduce administrative burden, minimize tax and compliance risk, and ensure drivers are reimbursed fairly and accurately, without needing to become an expert in reimbursement calculations yourself. 

The result? A mileage reimbursement program that’s easier to manage, easier to scale, and more reliable for both employers and employees.

Talk to Cardata’s mileage reimbursement experts to find the right program for your team and take the complexity out of calculating, managing, and scaling your vehicle reimbursement strategy.