The Ultimate Guide to Mileage Reimbursement for 2026

When your business has a mobile workforce that is driving their personal vehicles for work, you need a fair, accurate, and compliant way to reimburse your employees for those costs. 

This is where mileage reimbursement programs come in. 

A mileage reimbursement program is a structured method for paying employees back for the business-use of their own cars. It covers expenses like fuel, insurance, maintenance, and depreciation, without pushing unnecessary costs or tax burdens onto either the employer or the driver.

Mileage reimbursement programs matter more today than ever. Driving costs have surged, IRS scrutiny around taxable allowances has increased, and many organizations now operate across multiple states that have different cost conditions. 

At the same time, businesses are under pressure to control spending, protect themselves from compliance risk, and offer compensation programs that help them attract and retain talent.

A well-designed mileage reimbursement program does all of that: it keeps reimbursements fair, keeps companies compliant, and ensures employees aren’t paying out of pocket to do their jobs.

This guide breaks down how mileage reimbursement programs work, why they’ve become essential, and how to choose the right approach for your workforce.

What is a Mileage Reimbursement Program?

A mileage reimbursement program is a system for reimbursing employees for using their personal vehicles for business driving. 

Instead of driving company cars, employees drive their personal vehicles, and are reimbursed for the costs based on mileage, fixed and variable costs, or a combination of both, depending on the program type. These reimbursements cover expenses like fuel, maintenance, insurance, depreciation, and wear and tear. 

Whether your employees are delivering products, supporting service teams, or driving to meetings with prospects, mileage reimbursement programs are designed to help businesses that have a mobile workforce run smoothly. 

A good mileage reimbursement program makes sure drivers are reimbursed fairly for the costs they take on, while also reducing administrative overhead, and generating savings for both the company and the driver. 

The IRS Standard Mileage Rate Explained 

Once you understand what mileage reimbursement is, the next step is understanding how the IRS standard mileage rate helps determine what counts as a fair, tax-free payment.

The rate serves as the benchmark for what the IRS considers a reasonable, tax-free reimbursement amount for business driving. When employers reimburse employees at or below this rate, the payment is automatically treated as non-taxable, as long as mileage is properly substantiated. 

This makes the standard mileage rate the foundation of the Cents Per Mile (CPM) reimbursement method and an important comparison point for programs like FAVR and Tax-Free Car Allowance (TFCA).

In short:

• CPM uses the IRS rate directly—it is the reimbursement amount.
• TFCA programs use it as a cap—reimbursements above the IRS rate become taxable.
• FAVR programs don’t use the rate, but should outperform it in accuracy and compliance—the IRS rate still acts as a regulatory reference.

The standard mileage rate is essentially the IRS’s “safe harbor” for tax-free business driving reimbursement, which is why it plays a central role in the topic.

Types of Mileage Reimbursement Programs (Explained)

Common mileage reimbursement programs include Fixed and Variable Rate (FAVR) and Cents Per Mile (CPM) models, both of which offer IRS-compliant, tax-free reimbursements when properly structured. There are also Tax Free Car Allowances (TFCA), as well as the option to create a program that mixes reimbursement models. 

1. Fixed and Variable Rate (FAVR) 

FAVR is an IRS-sanctioned mileage reimbursement program that is tax free for compliant drivers. On a FAVR program, companies follow an IRS-approved methodology for calculating mileage reimbursements. 

These reimbursements include a monthly fixed rate and a per-mile variable rate. Importantly, these rates are not based on the vehicles that their employees actually drive, they are based on the cost of owning and operating a program standard vehicle in each driver’s location. 

Eligibility, Vehicle, and Employee Requirements for FAVR

Employees on FAVR must be full-time employees (FTEs), and a minimum of five or more drivers must be on FAVR within a company. FAVR is typically best for drivers who drive at least 5,000 business miles per year.

Employees must meet compliance rules such as having insurance coverage equal or greater than company standards, driving a vehicle not older than the program’s retention cycle requirement, and the vehicle’s MSRP must be at least 90% of the standard vehicle cost chosen by the company.

FAVR reimbursements are always paid with no tax deductions at the source. But drivers must comply with FAVR’s tax rules to guarantee that they will not be assessed taxable income in the future. 

If a driver complies with every FAVR tax rule, their reimbursement will be 100% tax free, regardless of the amount. If they do not comply with one or more of these rules, their reimbursement will be tested for taxable income retroactively. 

Depending on that driver’s reimbursement and business mileage, they may be assessed taxable income on a portion of their FAVR reimbursement. 

2. Cents Per Mile (CPM)

CPM is a simple, tax-free reimbursement program that employers can use to compensate their employees who drive for work. On a CPM program, employers pay drivers a flat rate for each business mile they drive. This is generally a good fit for low mileage drivers. 

Most cents per mile programs are paid at the IRS standard mileage rate, a safe harbor mileage rate provided by the IRS. In 2026, the rate is set to 72.5 cents per mile. 

The standard rate is typically updated annually, but may be updated more frequently to reflect changes in the cost of driving. Any CPM rate paid to drivers is tax-free as long as it does not exceed this amount. 

Unlike FAVR programs, CPM programs have very few compliance requirements for drivers. But since CPM programs are a type of accountable allowance, drivers do need to maintain compliant mileage logs to participate. 

3. Tax Free Car Allowance (TFCA)

A TFCA is an IRS-compliant way to reimburse employees who use personal vehicles for work. It follows IRS Publication 463, which outlines rules for accountable plans, so TFCA is sometimes called a “463 Accountable Allowance.”

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 reimbursement 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.

How Mileage Reimbursement Works: Key Components

A mileage reimbursement program is built on a few core principles that determine how accurate, compliant, and fair your reimbursements will be. Understanding these fundamentals makes it easier to compare programs and choose the right structure for your team.

1. Business-Use Mileage

Everything starts with mileage. Employers can only reimburse employees for the portion of driving that’s strictly for business: travel between client sites, service calls, or sales visits. Personal miles, like commuting to and from the office, don’t qualify.

Accurately capturing and reporting business-use mileage is the foundation of every IRS-compliant reimbursement model.

2. Fixed vs. Variable Costs

With a mileage reimbursement program, driving expenses fall into two categories:

• Fixed costs, such as insurance, depreciation, and registration fees. These don’t change with mileage.
• Variable costs, like fuel, tires, and routine maintenance. These scale up the more someone drives.

Programs that separate these costs (like FAVR) tend to be more precise because they reflect the real economics of vehicle ownership and use.

3. Taxable vs. Tax-Free Reimbursements

The IRS distinguishes between taxable stipends and tax-free reimbursements. Choosing the right model can dramatically change the cost of your program.

• Reimbursements that are supported by accurate mileage logs and compliant program structures can be tax-free for both employers and employees.
• Lump-sum car allowances or unsubstantiated payments are treated as taxable income, reducing take-home value and increasing payroll tax liability.

4. Required Documentation (Mileage Logs & Substantiation)

To stay compliant, companies must maintain audit-ready mileage logs that document:

• Date of the trip
• Business purpose
• Start and end location
• Miles driven

This documentation is what keeps your reimbursements tax-free. Without it, the IRS treats the reimbursement like income. And while you can track mileage by hand, manual logs are easy to forget, miscalculate, or lose. 

That’s why many companies rely on automated mileage-capture tools. They record trips accurately in the background, simplify compliance, and take the pressure off both drivers and administrators.

Choosing a Mileage Reimbursement Program: What to Consider 

Choosing the right mileage reimbursement program starts with understanding how your employees drive, what their jobs require, and how your choices affect taxes, compliance, and cost. 

Here’s what to evaluate as you decide which IRS-compliant program, FAVR, CPM, or TFCA, fits your organization best.

1. Consider How Much Your Employees Drive

Mileage volume is one of the biggest factors in selecting the right program.

• High-mileage employees (5,000+ business miles/year): FAVR typically delivers the most accurate and fair reimbursement because it separates fixed and variable costs and adjusts for geography and vehicle type. When operated within IRS rules, it’s fully tax-free.
• Lower-mileage or occasional drivers: CPM works well for employees who drive unpredictably or infrequently. It’s simple, tax-free at or below the IRS rate, and easy to administer.
• Employees who need predictability or don’t drive often: TFCA combines a fixed stipend with mileage tracking, reducing tax exposure and delivering more flexibility when FAVR isn’t practical but CPM feels insufficient.

2. Consider What the Job Requires

Mileage alone doesn’t tell the whole story. The nature of the work matters, too.

If employees need specialized vehicles like cargo vans, service trucks, or CDL equipment, a company-provided fleet may be the safer and more efficient choice.

But if employees can use a standard personal vehicle, reimbursement programs shift ownership costs away from your business while keeping reimbursements fair and compliant.

3. Consider IRS Compliance and Tax Risk

Different programs come with different levels of compliance responsibility. Tax-free programs (FAVR, CPM, TFCA) must follow IRS rules around mileage substantiation and program structure. 

A traditional car allowance often fails these tests, resulting in payroll and income taxes that reduce its value by roughly 30%.

• FAVR: Highest accuracy, most rules to follow, strongest financial outcome.
• CPM: Easiest administratively, but may lead to over/underpayment if used in the wrong scenarios.
• TFCA: A flexible option that remains tax-advantaged.

Choosing the right model requires balancing compliance requirements with financial efficiency.

4. Consider Geographic Differences in Driving Costs

Driving costs aren’t the same everywhere. Insurance, gas, and maintenance vary widely by region. 

A reimbursement model that doesn’t adjust for location will create pay inequities between employees, and so if you have employees driving in different regions or states, you’ll want to consider how their driving costs differ.

FAVR automatically accounts for regional cost differences, ensuring fair reimbursement. TFCA or CPM can also work if rates are set thoughtfully and adjusted for regional variance.

5. Consider Whether a Mixed Approach Makes Sense

The best solution won’t always be one-size-fits-all. Companies with diverse driver profiles often find that they benefit the most from using a combination of reimbursement methods. 

For example, you might use FAVR for sales reps who drive a lot, CPM for field consultants with more occasional travel, and TFCA for senior managers. Mixing programs this way helps companies balance fairness with cost savings.

That said, it’s important to have clear communication, strong vehicle policies, and dependable tech in place to keep everything running smoothly and make changing employees between programs as easy as possible.  

Tips for Choosing a Mileage Reimbursement Program Partner

Choosing the right mileage reimbursement program is only half the equation. Choosing the right partner to run it is just as important. 

The vendor you select will shape how accurate your rates are, how smoothly your program operates, and how confident you can be in your IRS compliance. 

As you evaluate your options, here are the key factors to consider to ensure you’re choosing a partner who can support your drivers, protect your business, and scale with your growth.

1. Start with customer results.

Before anything else, look at how the vendor performs in the real world. Seek out reviews, case studies, and references from companies that look like yours. Strong customer satisfaction is a good sign that the vendor can support your team reliably and at scale.

2. Confirm they have deep IRS and industry expertise.

A reimbursement partner should know the tax code inside and out, and understand how driving patterns differ by industry. They should be able to design accurate, compliant rates and guide you toward the program type that best fits your workforce.

3. Choose a platform that makes life easier.

The right vendor will streamline your entire program. Look for an all-in-one platform that brings together reimbursement design, mileage capture, reimbursements, and reporting so you can manage everything in one place.

4. Make sure implementation is painless.

Technology should be simple to adopt. Your vendor should offer hands-on onboarding, clear training, and support that keeps your operations running smoothly during the transition.

5. Prioritize scalability and flexibility.

Your company’s needs might evolve over time, and your vendor should be able to keep up. Pick a partner whose tools and programs can expand or contract with your business, adapt to new market conditions, and support multiple program types as your workforce evolves.

Building a Fair, Compliant, and Cost-Efficient Program

A mileage reimbursement program isn’t just a way to reimburse employees for business driving. It’s a critical part of how your business supports the people who keep it running. 

When designed well, a mileage reimbursement program ensures drivers are paid fairly, protects your company from unnecessary tax risk, and creates a predictable, scalable framework for managing the real costs of business driving.

The right program will depend on your team’s mileage patterns, job requirements, geographic spread, and financial goals. Whether that means a precise FAVR program for high-mileage employees, a simple CPM model for occasional drivers, or a TFCA for roles that need predictability, what matters most is choosing a structure that aligns with how your workforce actually drives.

And while understanding the reimbursement models is essential, choosing the right partner to help operate them is just as important. A strong vendor brings expertise, compliance support, easy-to-use technology, and the ability to scale with your business as it grows or changes.

With the right strategy and the right partner, your mileage reimbursement program can become a competitive advantage. It helps you control costs, stay compliant, keep your mobile workforce happy, and ensure no employee has to pay out of pocket to do their job.

If you’d like help evaluating your current program or exploring which model fits your team best, get in touch with Cardata.