Mileage Reimbursement 2026: What Employers Need to Know

The 2026 mileage rate — and a rare change mid-year

Most years, the IRS sets one mileage rate in December and employers apply it for the following twelve months without a second thought. 2026 hasn't worked that way. The business rate opened the year at 72.5¢ a mile, then rose to 76¢ a mile from 1 July — only the second mid-year adjustment since the 1970s, the last being in 2022 after fuel prices spiked following Russia's invasion of Ukraine.

The IRS set the original 2026 figures in Notice 2026-10, effective from 1 January: 72.5¢ a mile for business driving, 20.5¢ for medical or moving mileage (armed forces only), and 14¢ for charitable driving, a rate fixed by statute rather than reviewed annually. Fuel costs then climbed sharply over the following six months, and the IRS used a follow-up announcement to lift the business rate to 76¢ and the medical/moving rate to 23.5¢ from 1 July, as SHRM reported. The charitable rate stayed at 14¢, as it always does — it's set by Congress, not the IRS.

For payroll, this means splitting the year: multiply January-to-June business miles by 72.5¢, July-to-December miles by 76¢, then add the two totals together. Get it wrong and you either shortchange staff or over-reimburse beyond what's tax-free. For the full detail on how the rate was set, see our 2026 IRS mileage rate guide and the five-year rate trend analysis.

IRS rate vs flat allowance vs FAVR: how they compare

Employers have three broad options for reimbursing staff who drive their own vehicle for work. Pay the IRS mileage rate and, provided you run an accountable plan — a business reason for the trip, logged miles, reimbursement tied to actual mileage — the payment is free of income tax and payroll tax for both sides. Pay a flat monthly car allowance instead and, in almost all cases, the whole amount is taxable income, because it isn't tied to substantiated business use. FAVR (Fixed and Variable Rate) reimbursement sits between the two: part fixed monthly payment, part per-mile rate, both calculated from the employee's local costs and vehicle, and it stays tax-free if the plan meets IRS conditions.

What is FAVR, and when does it make sense?

FAVR pays a fixed monthly amount for costs that don't change with mileage — depreciation, insurance, registration — plus a variable cents-per-mile rate for fuel, tyres and maintenance, both based on the employee's ZIP code and vehicle. It's the main IRS-sanctioned alternative to the standard mileage rate for organisations with sales teams, field engineers or other high-mileage staff, because it can reimburse more accurately than a flat rate without becoming taxable. The trade-off is administration: a FAVR plan needs annual cost-data updates, mileage logs from every driver, and a vehicle that meets the IRS's cost cap — $61,700 for 2026, up from $61,200 in 2025. Read our full FAVR explainer before switching a fleet over.

Updating your written policy for 2026

A mileage policy that still references 70¢, or a single flat 2026 figure, is now wrong twice over. Make these changes before year end:

1. Update the rate reference. Replace any flat 2026 figure with the split rate — 72.5¢ for miles driven 1 January to 30 June, 76¢ from 1 July — and set a reminder to update it again once the IRS confirms 2027 rates in December.
2. Reissue the policy, not just the rate sheet. Circulate the updated document through the same channel used for the original rollout (handbook, intranet, signed acknowledgement) so there's a record staff received it.
3. Notify payroll and finance directly. Rate changes announced mid-year are easy to miss if payroll only checks IRS updates in December. Confirm the effective date is loaded into whatever system calculates reimbursements.
4. Brief managers who approve expense claims. They need to know the split-rate rule so they don't reject a July claim for looking 'too high' or approve a January claim at the wrong rate.
5. Check linked policies too. Car allowance amounts, FAVR cost data and travel policies (see our mileage reimbursement policy template) often reference the mileage rate and need the same update.

Common mistakes employers make with mileage reimbursement

• Paying above the IRS rate without treating the excess as wages. Reimburse at, say, 80¢ a mile after 1 July 2026, and the 4¢ over 76¢ counts as taxable wages, subject to withholding — even if the whole payment is labelled a mileage reimbursement.
• Not requiring mileage logs. Without a record of date, destination, purpose and miles driven, the IRS can treat an entire reimbursement as taxable, regardless of the rate used. See our guide to the IRS mileage reimbursement rules for what counts as adequate substantiation.
• Forgetting that ordinary commuting doesn't count. Miles between home and a regular workplace are not reimbursable business mileage under IRS guidance — only travel beyond the normal commute, such as to a client site or a second location, qualifies.
• Missing the mid-year switch. Continuing to reimburse at 72.5¢ after 1 July shortchanges staff; continuing to apply 76¢ before 1 July over-reimburses and risks the excess being taxed as wages.
• Letting FAVR cost data go stale. A FAVR plan built on 2024 vehicle and insurance costs no longer reflects reality — the IRS expects annual recalculation, not a one-off setup.

“The IRS mileage rate is an important benchmark, but it is not the only way organisations can approach vehicle reimbursement.”

— Phong Nguyen, CEO, Motus, quoted in SHRM, July 2026

2026 mileage policy checklist for HR and finance

1. Confirm payroll applies 72.5¢ for January–June miles and 76¢ for July–December miles
2. Reissue the written mileage policy with the split rate and 2026 effective dates
3. Decide whether flat allowances, IRS-rate reimbursement or FAVR best fits each employee group
4. Require mileage logs (date, purpose, miles) for every claim, and audit a sample each quarter
5. Flag any reimbursement above 76¢ a mile to payroll for taxable-wage treatment
6. Update FAVR cost data and the $61,700 vehicle cap if you run a FAVR plan
7. Check state rules — California and a handful of other states require reimbursement of reasonable business expenses regardless of which method you use
8. Run a sample claim through the mileage reimbursement calculator to confirm payroll's numbers match