Mileage reimbursement explained: Does it include gas and what method is best for your business?

For many small businesses, reimbursing employees for business-related driving is more than just a courtesy—it’s also tied to valuable tax benefits like the small business mileage deduction.

But many business owners are unsure what mileage compensation actually covers. Does mileage reimbursement include gas? How do you know if you're paying enough—or too much?

In this guide, we’ll discuss the standard mileage rate for 2025, break down what’s included in business mileage reimbursement, compare three IRS-approved reimbursement methods, and help you decide what’s best for your team and budget.

IRS mileage rate 2025

As of Jan. 1, 2025, the IRS has set the standard mileage rate for business use at 70 cents per mile. This rate applies to all vehicles, including electric, hybrid, gasoline, and diesel-powered cars.

How mileage compensation works

Mileage reimbursement is all about compensating your team for the costs they rack up while driving their personal vehicles for business purposes. It covers a range of business expenses associated with operating a vehicle, ensuring they’re fairly compensated for work-related travel.

To determine whether gas is included in your employee mileage reimbursement policy, we must first understand the reimbursement methods used to calculate mileage expenses.

There are three most popular methods of mileage reimbursement:

• IRS standard mileage rate
• Actual expense method
• Fixed and variable rate (FAVR) method

IRS standard mileage method

Each year, the Internal Revenue Service (IRS) publishes its standard mileage rate. This figure is based on national averages for vehicle-related costs—factoring in everything from maintenance and depreciation to oil prices to an estimated gas expense per mile. It serves as a simplified way to reimburse employees without tracking each individual cost, including fuel. That said, some driving-related costs can spike periodically. Learn how to plan for these ups and downs in your reimbursement policies by understanding periodic expenses.

The standard IRS mileage deduction offers a per-mile rate that reflects average vehicle costs, and can serve as a benchmark for fair compensation for business miles. As a business owner, you can use this number to guide your mileage expenses reimbursement policy, or you can decide that a better method is more suited to your company.

However, one issue is that local gas rates may vary significantly compared to national averages, meaning the IRS rate may not fully cover the cost of car-related expenses, and your employees could feel they’re taking a hit financially every time they drive their personal vehicle for business.

This is where the other reimbursement methods come in handy.

The IRS method is the easiest, but what if your team drives in areas with much higher gas prices than the national average? That’s where the Actual Expenses method comes in.

Actual Expense method

The actual expenses method covers all the actual costs incurred when using a vehicle for business purposes. In other words, your employees add up their total vehicle expenses, including the cost of gas, tolls, car insurance premiums, maintenance, and depreciation. They then determine the percentage their car is used for work versus personal business, and multiply those two numbers.

So, let’s say one of your salespeople has determined that they use their personal vehicle 50 percent of the time for business, and in the past month, they have spent $300 on car-related costs. That means, with proper documentation, using the actual expenses method, you would reimburse them $150.

The potential downside of the actual expenses method is that it requires meticulous documentation and accurate mileage logs, and there is room for discrepancies in the percentages of time spent. The FAVR method seeks a middle ground to address this issue.

FAVR reimbursement

The fixed and variable rate (FAVR) reimbursement method provides a more precise reflection of driving expenses. The FAVR method provides an allowance for fixed costs like insurance, and reimburse your employees’ actual expenses for their variable costs, like fuel, tailoring reimbursement to specific costs, ensuring it aligns closely with what is actually spent.

As a result, you’re taking the best of both worlds, which helps you stay on budget while ensuring your employees are reimbursed fairly for using their personal vehicles for work. The method works only works as well as your policies, so you need to ensure a few things to keep expenses in check:

• Accuracy in reporting: Methods like FAVR can unintentionally incentivize fraud and gas theft. For instance, an employee might fill their personal vehicle with gas outside work hours but submit a claim for it. Mileage tracking apps and firm expense policies help here.
• Spend category controls: Controls on expense categories helps keep your team inline with your policies
• Tracking expense reports: When you track expense reports in real time, it’s easier to prevent and identify fraud

Which reimbursement method best covers gas costs?

The bottom line is that your business mileage reimbursement rate should include fuel costs. This is true regardless of the method you use to reimburse your employees.

The real question is how accurately each method reflects your employees’ actual fuel expenses. Actual expenses and FAVR methods tend to be more precise since they use local gas prices, while the IRS rate uses national averages that might not match prices in your area.

So if you use the IRS standard mileage rate, your employees may notice that not all of their gas expenses are covered. If you use the FAVR method, you will most likely compensate employees for all of their gas expenses.

And here’s a quick overview of how gas mileage reimbursement methods compare:

How to choose the right mileage reimbursement method

Choosing the right mileage reimbursement rules is about aligning with your organization’s expense policy goals. Do you want to streamline the process, cut costs, or ensure fair employee compensation? Knowing your objectives guides your choice.

• Consider how often and where employees drive for work: These factors influence their costs and can vary widely. Align your mileage policy with broader cost controls by reviewing how you budget for fixed and variable expenses. A method that is well suited for one group might be suitable for another, especially when considering differing driving conditions.
• Assess your administrative capabilities: Methods like FAVR demand detailed tracking and management. If resources or systems are a concern, simpler methods like the IRS mileage rate, might be more feasible.
• Compare the costs and benefits of each method: For instance, the FAVR method might come with high costs. However, when tied to a robust expense management platform, the time saved by automating expense tracking can offset those costs.

Streamline your mileage reimbursement with Ramp

Managing mileage reimbursement manually can lead to overpayments, policy violations, and frustrated employees. Ramp automates the entire process—from mileage tracking to approvals—so your team stays compliant, efficient, and happy.

Join over 25,000 businesses that trust Ramp to optimize their finance operations. Let us help you build a stronger business by modernizing your financial processes. Request a demo or sign up today.