To pay mileage for employees, multiply each worker’s documented business miles by the IRS standard mileage rate — 72.5 cents per mile for 2026 — and pay it out through an accountable plan so the reimbursement stays tax-free for both of you.1Internal Revenue Service. 2026 Standard Mileage Rates Do it wrong and the payments become taxable wages, with withholding and payroll tax owed on money the employee already spent on gas.
The 2026 Rate and the Basic Calculation
IRS Notice 2026-10 sets the business standard mileage rate at 72.5 cents per mile for miles driven on or after January 1, 2026, up from 70 cents in 2025.2Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents That single rate folds in fuel, depreciation, insurance, oil, tires, and routine maintenance, so you don’t price out each cost separately.
The math is intentionally simple. An employee who logged 500 business miles in a month gets $362.50. Use the rate in effect for the calendar year the miles were driven: miles from December 2025 get reimbursed at 70 cents; miles from January 2026 get 72.5 cents, even if both appear on the same expense report.3Internal Revenue Service. Standard Mileage Rates
Tolls and parking are reimbursed separately at actual cost on top of the per-mile amount — the standard rate doesn’t cover them.4Internal Revenue Service. FS-2006-26, Car and Truck Expense Deduction Reminders So the same 500-mile month with $15 in bridge tolls and $20 in garage parking pays out at $397.50. You’ll need receipts for the tolls and parking, just like you need the log for the miles.
Which Miles You Can Reimburse
The commute is not reimbursable. Driving between an employee’s home and their regular workplace is personal mileage, no matter how long the drive or what they think about on the way.5Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses Parking fees at that regular workplace and tolls on a daily commute route are personal too, and you can’t reimburse them tax-free.
Business mileage covers the rest of the workday driving: travel between two work locations, trips to visit clients or customers, drives to business meetings away from the regular office, and travel from home to a temporary workplace. The IRS treats an assignment as “temporary” only if the employee realistically expects it to last a year or less. Once that expectation flips to more than a year, the trips become nondeductible commuting from that point forward, even if the employee hasn’t yet worked there twelve months.6Internal Revenue Service. Topic No. 511, Business Travel Expenses
Spell the commuting line out in your reimbursement policy. A remote employee who drives to a client site is racking up business miles. That same employee driving to the main office every Tuesday for a standing meeting is commuting.
The Three Accountable Plan Rules
Whether a mileage payment is tax-free comes down to whether your arrangement qualifies as an accountable plan. The IRS requires three things:7eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
- A business connection. The expense must relate to services the employee performed for you. Personal errands tagged as business trips fail this test.
- Substantiation. The employee must document each trip with enough detail to prove it happened for a business reason, within a reasonable period.
- Return of excess. If you advance more than the substantiated expenses come to, the employee must return the difference within a reasonable period.
Miss any one of the three and the arrangement is a nonaccountable plan. Under a nonaccountable plan, every dollar you pay becomes wages subject to federal income tax withholding and FICA — regardless of whether the miles were actually driven.7eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements You owe the employer share of payroll taxes on the full amount, and the employee’s net payment shrinks.
What Employees Need to Log
The substantiation rule, in practice, means a mileage log. Revenue Procedure 2019-46 lays out what the IRS expects: date, destination, business purpose, and odometer readings at the start and end of each trip.8Internal Revenue Service. Revenue Procedure 2019-46 “Business purpose” needs to be specific enough that a stranger reading the log would understand why the trip happened. “Client meeting with Acme Corp at their downtown office” works. “Business” by itself doesn’t.
Logs need to be created close to when the trip happens. Something reconstructed from memory at quarter-end won’t hold up in an audit. GPS-based mileage apps are the most reliable option, but a paper notebook filled out the same day works too.
How Fast the Log Has to Come In
The IRS doesn’t set one hard deadline, but it defines safe harbors. Under the fixed-date safe harbor, an expense substantiated within 60 days after it was paid or incurred is treated as timely.7eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements You can also use a periodic-statement method: send quarterly reminders and give employees 120 days from the statement to substantiate outstanding advances or return unsubstantiated amounts.
How Long to Keep the Records
Hold onto mileage logs for at least three years from the date the related tax return was filed. That matches the IRS’s general statute of limitations for examining returns.9Internal Revenue Service. How Long Should I Keep Records? If the IRS audits, both you and the employee need to produce the underlying documentation.
Paying It Out
Most employers use expense software where the employee uploads the log, attaches toll and parking receipts, and the system multiplies out the total. Smaller shops use a signed paper form routed to payroll. Either way, a manager should verify the business purpose and check the math before approving.
Approved reimbursements run through the regular payroll cycle or go out as a separate check. Under an accountable plan, the payment isn’t included in the employee’s wages: no federal income tax withholding, no Social Security tax, no Medicare tax on the reimbursed amount.5Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses Most employers process within one to two pay cycles of submission.
When the Payment Becomes Taxable
Paying at or below 72.5 cents per mile under a valid accountable plan keeps the whole reimbursement out of the employee’s income. Nothing lands in Box 1 of the W-2, and you still deduct the reimbursement as a business expense on your return.5Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
Pay above the standard rate and the excess becomes wages. An employer paying 85 cents per mile reports 72.5 cents as nontaxable (Code L in Box 12) and the extra 12.5 cents per mile as wages in Box 1, subject to income tax and payroll taxes.5Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
If the plan fails accountable status entirely — no substantiation, no return-of-excess rule — every dollar becomes taxable wages, including the portion within the standard rate.7eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements Sloppy documentation costs real money on both sides of the paycheck.
Getting Excess Back
When an advance or reimbursement turns out to exceed what the employee actually substantiated, the extra has to come back. A return within 120 days of when the expense was incurred is timely under the safe harbor.7eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements Miss the window and the unreturned amount is reclassified as wages and reported on the W-2.
Alternatives to the Standard Rate
The standard rate isn’t the only option. A Fixed and Variable Rate (FAVR) plan splits reimbursement into a periodic fixed payment for costs like depreciation, insurance, and registration, plus a variable cents-per-mile amount for fuel and maintenance. The point is to match what it actually costs a specific employee to operate their vehicle in their region. FAVR plans have strict qualification rules, including a requirement that the employee’s vehicle cost at least 90 percent of the “standard automobile cost” the plan uses, and a retention period of at least two years.10Internal Revenue Service. Rev. Proc. 2000-48 The IRS updates the maximum automobile value annually.11Internal Revenue Service. The Standard Mileage Rates and Maximum Automobile Fair Market Values Have Been Updated for 2026 The overhead means FAVR mostly shows up at companies with large mobile workforces.
The actual expense method reimburses documented vehicle costs directly: fuel, oil changes, tires, insurance, repairs, depreciation, registration. The employee tracks every cost and keeps every receipt, and you pay the actual amounts back. This can produce a bigger reimbursement for employees driving expensive vehicles in high-cost areas, but the paperwork is heavier. If depreciation gets claimed under the actual method for a given vehicle, you can’t switch that vehicle to the standard rate in a later year.
State Rules and Whether Reimbursement Is Required
Federal law doesn’t actually require you to reimburse mileage. The IRS rules only govern how a reimbursement is taxed once you choose to pay one. Roughly a dozen states and a handful of cities, however, have laws requiring employers to reimburse necessary business expenses, which generally includes vehicle mileage. In those jurisdictions, failing to reimburse isn’t a policy choice — it exposes you to wage claims. If you operate in more than one state, check whether any of your locations fall in a mandatory-reimbursement jurisdiction, because that obligation lives in state employment law rather than the federal tax code.