Mileage Reimbursement and the IRS Mileage Rate
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Mileage Reimbursement and the IRS Mileage Rate

headshot of Xochitl Arteaga By Xochitl Arteaga July 8, 2022

Categories: Mobile Workforce Vehicle Reimbursement

When it comes to mileage reimbursement, employers have many options to choose from. Those options include: car allowances, the IRS mileage rate, cents-per-mile rates (other than the IRS) and fixed and variable rate (FAVR) programs. Companies often choose the IRS rate because it seems the most standard and accurate. Because if the IRS set it, it has to be accurate, right? Unfortunately, it isn’t quite so simple. In this post we’ll go through each option, explain why the IRS rate is far from perfect and which program offers the most accuracy.

The Shortcomings of the IRS Mileage Rate

The problem with using the IRS rate for mileage reimbursement? The IRS does not recommend it as a reimbursement rate. Its main purpose is to serve as a base rate for individuals to calculate a tax deduction for their unreimbursed driving expenses, a tax deduction that is no longer available.

Each year, the IRS mileage rate is based on the previous year’s average costs of operating a vehicle. This means the rate is inherently inaccurate. It’s not reflective of current prices, and it’s based on nationwide averages, rather than location-specific costs. As a result, the IRS mileage rate is best suited for employees that do not drive often for business. Companies generally consider driving more than 5,000 business miles annually “often.”

Drawbacks of the IRS Rate for Mileage Reimbursement

Some may argue that using the IRS rate for all employees creates a uniform method of reimbursement. In reality, companies using this rate will over-reimburse some employees and under-reimburse others. Take for example, a Los Angeles, California employee paying $6.50  a gallon for gas. Now compare that to a Hanover, New Hampshire employee paying $4.90 a gallon. The California employee receives the same reimbursement per mile but is spending $0.80 more per gallon. Differences in other driving costs could further heighten this discrepancy.

The costs of gas, insurance, maintenance, license fees and other general vehicle expenses vary widely across the country. Mileage reimbursement rates should as well.  Only the fixed and variable rate (FAVR) methodology – which is the IRS’s only recommended reimbursement approach – ensures this is the case.

Other Vehicle Program Options

Using the IRS mileage rate is a popular vehicle program option. But it isn’t the only option. As mentioned earlier , other popular mileage reimbursement options include using a cents-per-mile rate other than the IRS mileage rate or car allowances. We’ll spell those out in more detail below.

Cents Per Mile (CPM)

Earlier we shared that the IRS mileage rate is a guideline. As long as a company reimburses at or below the IRS mileage rate, mileage reimbursements remain untaxed. That means companies can control mileage spend by reimbursing at a more reasonable rate. However, like the IRS mileage rate, CPM programs can also have issues.

For one, the spend can vary drastically month over month. Depending on the industry, certain months may require more driving than others. This makes accounting for mileage spend in the budget much more difficult. Additionally, CPM programs reward high mileage drivers. The more miles they drive, the higher their reimbursement.

Ideally, companies with a CPM program have a regional pool of drivers that travel no more than 500 miles each month. Businesses with driving employees spread across a larger area and operating with widely varying mileages might be better off with another program.

Car Allowance

Car Allowance programs are incredibly easy. Companies pay their driving employees the same stipend month over month. But with that simplicity comes a large amount of tax waste. Because the stipends are not substantiated with mileage logs, the IRS considers each car allowance additional income. That means its exposed to income tax on both the employer and employee.

A car allowance also fails to accurately reimburse employees for the same reason the IRS rate and CPM programs do. One payment (or rate) applied to all driving employees creates winners and loser. Driving employees that live in areas with low vehicle ownership costs will be able to make use of left-over funds in their stipend. On the other side of the scale, driving employees in high-cost areas may stop driving for business once the stipend stops covering their expenses.

A More Accurate Vehicle Program

We walked through why the IRS mileage rate isn’t the best option. We also explained the shortcomings of CPM and car allowance programs. This raises the question: is there a vehicle program that fairly and accurately reimburses employees? Luckily, there is. And it’s called the Fixed and Variable Rate (FAVR) reimbursement program.

The FAVR methodology provides each employee with a tax-free reimbursement aligned with their fixed and variable driving costs. FAVR calculates the fixed costs (i.e. insurance, taxes, depreciation) for each individual based on where they live. The variable costs (i.e. gas, maintenance, tires) are based on distance traveled and current gas prices in an employee’s driving territory.

Reimbursing employees based on their location and mileage-specific costs makes the FAVR methodology the fairest and most accurate reimbursement option a company can choose.  It may seem more difficult to adopt than simply using a CPM rate or stipend for all employees, but the benefits of providing both tax-free AND accurate reimbursements make FAVR programs a far superior mileage reimbursement method for most companies. By paying the right amount, companies can eliminate over and under-reimbursements – providing cost savings and mitigating legal risk. They can ensure all employees are treated fairly.

Getting Started with FAVR

With the right vehicle program vendor, getting started with FAVR is easy. However, finding that vendor and vetting them can take time. These initial steps can help you get a FAVR program off the ground.

  1. Determine the annual mileage your driving employees drive.
  2. Compare the gas prices that your employees deal with on a daily basis.
  3. Select the right vehicle program vendor.
  4. Work with your vendor to create an implementation plan.

Interested in seeing if FAVR might be the right program for your company? Or just interested in learning more? You can find out more about the Fixed and variable rate reimbursement program and how it can benefit your company here.

Learn More Here

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