How to calculate mileage reimbursement: Rules and rates for 2025

When to reimburse employees for mileage

Any time an employee or contractor uses their own vehicle for business use, it qualifies for mileage reimbursement. This includes traveling to client meetings, attending events, or completing work-related tasks. However, not all business mileage is reimbursable. Notably, mileage related to regular commuting is not reimbursable.

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Many businesses choose to reimburse employees for their travel costs on a monthly basis. Depending on the number of employees you have and how frequently they travel, you could also reimburse them quarterly or even after each individual trip.

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But remember: The amount you reimburse your employees shouldn’t surpass the IRS standard mileage rate for the given tax year. If it does, the excess amount you reimburse employees will be treated as taxable income.

Challenges with mileage reimbursement

While mileage reimbursement is a common item on expense reports, it can introduce challenges to any bookkeeping practice.

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One common problem is setting up procedures to log business mileage accurately. This typically means either incurring software expenses to purchase a mileage tracker or devoting extra resources to ensuring you correctly record and report on all business mileage.

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The second is over-reimbursing (or under-reimbursing) employees. Because gas prices and maintenance costs vary widely by region, the standard mileage rate doesn’t compensate all employees equally depending on the cost of living in their area.

Mileage rate alternatives: Car allowance vs. FAVR vs. actual expenses method

Depending on your business travel needs, the standard mileage rate isn’t always the best method to reimburse business mileage. There are several other methods of reimbursing vehicle expenses, including car allowances, FAVR, and the actual expenses method.

Car allowance

Car allowances add a fixed amount to employees’ paychecks to cover car maintenance and fuel prices. However, much like mileage reimbursement, car allowances often underpay some employees while overpaying others.

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Unlike mileage reimbursements, which are tax-deductible, car allowances are taxed like payroll expenses. Opt for FAVR or the actual costs method to keep these expenses tax-free.

FAVR

A fixed and variable rate (FAVR) program is a hybrid between car allowances and mileage reimbursement. Employees receive a monthly allowance for fixed costs like insurance and registration, plus a variable-rate reimbursement based on business miles driven.

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FAVR programs are popular because they more closely approximate the variable costs and expenses associated with using a vehicle for business purposes. Just like mileage reimbursement, you must log each business trip if you use this method.

Actual expenses

Finally, the IRS allows businesses to itemize and deduct the actual expenses of owning and operating a vehicle. Rather than reimbursing employees with an estimate, actual costs track the total amount spent on a vehicle for business purposes. This eliminates the risk of under- or over-reimbursing employees since the numbers directly reflect the real cost of business travel and vehicle ownership.

Automate business mileage tracking with Ramp

No matter which method you choose to calculate employee mileage reimbursements, it’s important that you have a way to track business mileage accurately.

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Ramp’s expense reimbursement software makes it easy to automate mileage tracking, recordkeeping, expense reporting, and more in a single platform:

• Accurate mileage calculations: Ramp integrates directly with Google Maps so employees can easily track mileage for every business trip—no paper logbook required
• Easy receipt collection: Employees are prompted to scan and save receipts for travel expenses whenever they submit a reimbursement request
• Automated expense reimbursement: Manage your entire expense management and reimbursement process in one place

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Check out our interactive demo environment and see for yourself why Ramp customers save an average of 5% a year.