Everything You Need to Know About Calculating Mileage Reimbursement

Mileage reimbursement for mobile employees may initially seem like the simplest of math equations; miles driven, multiplied by a predetermined rate. But it’s usually not nearly as simple as it sounds, and calculating mileage reimbursement can get complicated, fast. 

It’s important to get mileage reimbursement before it gets you! Well-managed reimbursement will help your organization and its employees save precious time and resources while staying compliant with crucial tax regulations. In this article, we’ll help detangle the process, covering the necessary components, methods, and tools for calculating mileage reimbursement. 

What’s Required for Mileage Reimbursement? Let’s Ask the IRS

For mileage reimbursement payments to be considered nontaxable, or accountable, businesses must follow the IRS’s rules for an accountable plan. This plan dictates that:

• Mileage must be business-related. Side trips, personal errands, and commuting mileage (defined by the IRS as travel from an employee’s home to their place of work)don’t make the cut.
• Business mileage must be substantiated, within a reasonable period of time, in the form of an IRS-compliant mileage log. Mileage logs must contain the date, destination, and purpose of each trip.
• Any excess payments distributed to an employee must be returned by that employee within a reasonable period of time (usually 60 days). 

While there is no federal law requiring that businesses reimburse employees for work-related mileage traveled in their personal vehicles, California, Massachusetts, and Illinois have enacted laws mandating that businesses do so. 

Understanding IRS Mileage Rates

Another way the IRS helps dictate mileage reimbursement is by setting a standard mileage rate every year for businesses to use in their reimbursement calculations. This annual rate is determined by analyzing average costs of owning and operating a vehicle in the United States. 

While the most talked-about driving costs relate to pain at the pump, gas prices actually aren’t the biggest factor the IRS considers when calculating the standard mileage rate. An updated CompanyMileage analysis of the costs of owning and operating a vehicle found that depreciation actually constitutes the largest percentage of costs, at 28.3%. Fuel accounted for 21.1% of overall vehicle maintenance costs, followed by insurance at 16.2%, tires, repairs, and maintenance for 14.3%, and licenses, registration, and taxes for 7.7%.

Usually, the mileage rate the IRS sets for a year will stay the same for that entire year; 2025’s mileage rate of 70 cents is unlikely to change until the 2026 rate is announced. However, it’s not unheard of for the rate to be updated mid-year to account for unusually large fluctuations in national costs of vehicle ownership. In 2022, to account for a massive spike in – you guessed it – gas prices, the mileage rate saw a June increase from 58.5 to 62.5 cents per gallon. 

Choosing a Reimbursement Method

When calculating mileage reimbursement, what’s the best route to take? Well, there’s a couple of common options.

Actual Expenses Method

The actual expenses method of calculating mileage reimbursement calls for employees to add up the amount of money spent to operate their vehicle for work-related travel. They then multiply that amount by the vehicle’s business use percentage. Costs included in actual expenses calculations include maintenance, gas, tires, insurance, licensing and registration fees, depreciation, and lease payments. 

Many who use this method find it a deceptively unwieldy one, as it mandates that employees retain all receipts and other documents to help determine vehicle operation costs. A large amount of diligence and meticulous record-keeping are needed for accurate calculations. 

Even if workers find the time to commit themselves to such intensive administrative work, actual expenses calculations require a lot of data and a lot of math. That means a pretty high chance for human error. 

Additionally, some costs, such as ever-volatile gas prices, can be easily misinterpreted. And if your organization – and its employees – aren’t careful, attempts at using the actual expenses method could result in disagreements over reimbursement amounts, inaccuracies, and even instances of mileage reimbursement fraud.

Standard Mileage Rate Method

With this option, employees multiply the amount of work-related miles traveled in their personal vehicle by the IRS standard mileage rate. Many businesses greatly prefer the standard mileage rate method to using actual expenses, and it’s not hard to see why. It’s simple, transparent, and it cuts down on the opportunity for mistakes and miscalculations immensely. 

While using the standard mileage rate method is inarguably both easier and more elegant, it does have its own drawbacks. The IRS rate is calculated using aggregate national data. A rate determined by averaging costs across the country may not align perfectly with car maintenance costs in the region in which your business, specifically, operates. 

What About Using a Custom Reimbursement Rate? 

Great question! In most cases, you don’t have to use the IRS rate, after all. Your business could instead opt to use a custom rate that better aligns with vehicle costs in your area, but you’ll need to be careful. 

If your custom rate is too high, the amount overpaid will be considered employee wages, and therefore, taxable. Set the rate too low, and you risk triggering the FLSA kickback rule, in which mileage reimbursement ‘kickbacks’ push workers’ salaries under federal minimum wage, creating a wage and hour issue. 

An analysis of CompanyMilage customers found that most businesses that use a custom rate pay mileage reimbursement at about 90% of the IRS standard mileage rate. CompanyMileage also offers a free rate calculator, which helps businesses find custom rates based on area fuel costs.

How to Accurately Calculate Business Mileage

Let’s say your organization has, wisely, opted to use the standard mileage rate method for calculating mileage reimbursement. That means it’s time to try and determine the best way to calculate business mileage as efficiently and as accurately as possible.

What’s Your Recording Method? 

One of the most time-honored ways of recording business mileage for calculating mileage reimbursement is by using odometer logs. This method requires employees to record their odometer readings after work trips, calculating their business mileage by subtracting the difference. This is the simplest method, but also the most error-prone. One wrong calculation can render an entire reimbursement payment inaccurate.

Using odometer readings also makes mileage logs – and expense reports – harder to double-check for accuracy. There’s no real way to tell if employees are rounding numbers on their reports, inflating mileage, or trying to claim reimbursement for personal errands or commutes. instances of expense fraud could slip through the cracks, with your organization none the wiser. 

GPS tracking has become a more and more popular method for tracking and recording business mileage easily and conveniently in real-time. GPS technology can also help mobile workers plan and manage routes, coordinate trips, and share their location with management and supervisors. However, like with using odometer readings, GPS technology doesn’t have an intuitive way of differentiating between actual, eligible business travel and personal mileage. 

There’s also the method of calculating mileage reimbursement using point-to-point calculations. With point-to-point mileage tracking, employees use mileage reimbursement software to input the start and end point of each work-related trip. The system then takes these points and automatically finds the best route between them, calculating business mileage for reimbursement using this data. Using point-to-point calculations greatly reduces the chances for errors, ineligible mileage, and fraudulent reporting to make their way into employee expense reports.

Automating Calculation & Reimbursement

The benefits of the point-to-point method illustrates one crucial fact: Using automated processes greatly simplifies the process of calculating mileage reimbursement. Traditional manual methods aren’t wrong, technically, but they are slow and inefficient. 

With manual reimbursement workflows it’s easier to make errors, and harder to catch and correct them. There’s also ample room for data entry errors, lost or incomplete records, and approval bottlenecks, all likely to result in delayed or inaccurate reimbursement payments. Not the best way to thank your hardworking employees! 

Your business has nothing to lose and everything to gain by automating this process. Digital reimbursement tools take the onus off of employees to painstakingly log and organize their business travel. Letting efficient and intuitive mileage reimbursement software handle calculating mileage reimbursement frees up employees’ workdays for, well, their actual jobs, while bringing greater accuracy, efficiency, and speed to mileage tracking. 

Calculating Mileage Reimbursement Made Simple With CompanyMileage 

When handled incorrectly, calculating mileage reimbursement can be a complicated, disorganized headache. That’s why CompanyMileage has created a suite of software solutions designed specifically for pain-free reimbursement processes. 

Our mileage reimbursement software, SureMileage, uses automated point-to-point calculations to track business mileage without requiring workers to keep paper logs or calculate odometer readings. At the end of each workday, mobile employees just have to take a couple of minutes to organize their trips and photograph necessary receipts and documentation. Our mobile app, SureMobile, takes this convenience one step further, giving workers the ability to compile and submit reports using their smartphones while on-the-go. 

Once submitted, those expense reports move through a digital approval workflow, which can be easily customized to meet the unique needs of your business. Our systems also integrate with all major accounting and approval software, safeguarding fast and accurate payments, every time.

Let CompanyMileage take the guesswork out of calculating mileage reimbursement – and even save you money in the process! To find out more about how, contact us for a demo today.