IRS Mileage Reimbursement Rules for Employers

Employers can reimburse employees for business mileage tax-free — but only when the reimbursement follows IRS accountable plan rules and stays within the standard mileage rate. Here's what you need to know.

The 2026 IRS standard mileage rate

The IRS sets the optional standard mileage rate each December for the following year, and for 2026 it opened at 72.5 cents per mile for business use. On July 1, 2026, the IRS made a rare mid-year adjustment, raising the rate to 76 cents per mile in response to rising fuel costs. Reimbursing at or below the applicable rate for the date of travel keeps the payment outside the employee's gross income.

What makes a mileage reimbursement tax-free

• The reimbursement is for actual business driving — not commuting or personal trips.
• The employee submits a mileage log with dates, destinations, business purpose and miles within 60 days.
• The reimbursement amount does not exceed the IRS rate in effect on the date of travel (72.5¢ before July 1, 76¢ from July 1).

When reimbursement becomes taxable

• You pay above the applicable rate for the date of travel (72.5 cents before July 1, 76 cents from July 1) — the excess is wages.
• Employees don't submit logs — the entire reimbursement is a taxable non-accountable plan payment.
• You pay a flat car allowance with no log requirement — the full allowance is taxable.

FAVR: an alternative to the IRS rate

Fixed and Variable Rate (FAVR) reimbursement programmes calculate a per-mile rate based on actual regional fuel and insurance costs. They can legally exceed the IRS standard mileage rate without triggering income tax, but they require IRS-approved actuarial data and more administration.

Car allowances vs. mileage reimbursement

A monthly car allowance (e.g. $500/month) paid without mileage logs is taxable income to the employee. Mileage reimbursement — pay per mile driven for business — is tax-free when properly documented. Most employers find the mileage approach creates less payroll-tax exposure.