Mileage Reimbursement Rules for Teams (2026)

The Fair Labor Standards Act (FLSA) is the primary federal law governing wages and hours in the United States. It sets minimum wage, overtime rules, and child labor protections. What it does not do is require employers to reimburse employees for business expenses — including mileage.

There is no federal statute that compels a private employer to pay an employee back for the miles they drive on company business. Federal employees are covered under the General Services Administration (GSA) rate schedule, but private-sector workers have no equivalent federal protection.

However, there is an important FLSA nuance. If unreimbursed business mileage expenses push an employee's effective hourly wage below the federal minimum wage ($7.25/hour as of 2026), the employer may be in violation of the FLSA. This is most relevant for lower-wage employees who drive extensively — delivery drivers, home care aides, and similar roles. In those cases, the Department of Labor has taken the position that the employer must reimburse enough to keep the employee's effective wage above the minimum.

For most salaried or higher-wage employees, the FLSA minimum-wage floor is not a practical concern. But the absence of a federal mandate does not mean you should skip reimbursement. As we'll see, state laws may require it, and failing to reimburse creates real retention and morale problems.

While federal law is silent, several states have stepped in with their own requirements. If you have employees in any of these states, you are legally obligated to reimburse necessary business expenses, including mileage.

The key takeaway: even if your company is headquartered in a state without a reimbursement law, you must comply with the rules of the state where each employee works. A Texas-based company with a single salesperson in California must follow California Labor Code §2802 for that employee.

The most important concept in mileage reimbursement tax law is the accountable plan. Under Internal Revenue Code §62(c) and Treasury Regulation §1.62-2, an employer reimbursement arrangement that meets three specific requirements allows the reimbursement to be excluded from the employee's taxable income and deducted as a business expense by the employer. This is the gold standard. Every employer should structure their reimbursement program as an accountable plan.

If all three requirements are met, the reimbursement does not appear on the employee's W-2 at all. It is invisible to income tax, Social Security tax, and Medicare tax. The employer deducts it as an ordinary business expense. This is the outcome you want.

Under a non-accountable plan, mileage reimbursements must be reported as income in W-2 Box 1. The employer must withhold federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from the reimbursement amount. The employer also pays its matching share of FICA — an additional 7.65% on top of the reimbursement.

For a concrete example: if you reimburse a salesperson $10,000 in mileage under a non-accountable plan, the employee may net only about $7,000 after tax withholding, and your company pays an additional $765 in FICA taxes. Under an accountable plan, the employee receives the full $10,000 tax-free, and you pay zero additional payroll taxes. The difference is significant at scale.

Since the Tax Cuts and Jobs Act of 2017 suspended the employee unreimbursed business expense deduction through 2025, employees under a non-accountable plan cannot deduct the mileage on their personal returns either. They simply pay tax on it. This remains the case in 2026 — the TCJA provision is still in effect.

The 2026 IRS standard mileage rate of 72.5 cents per mile is not a legal requirement — it is a safe harbor. If you reimburse at exactly the IRS rate per substantiated mile, the IRS will accept that amount as a reasonable reimbursement without further proof that the amount matches actual vehicle costs.

You are not required to use the IRS rate. You can reimburse at a lower rate, a higher rate, or use actual expense reimbursement instead. But the IRS rate offers a powerful simplification: when you reimburse at or below the standard rate per substantiated business mile, the reimbursement is automatically treated as meeting the accountable plan substantiation requirement for the amount (though you still need a mileage log for the miles themselves).

If you reimburse above the IRS rate, the excess is treated as taxable wages unless the employee can substantiate that their actual vehicle costs exceeded the standard rate. Most employers avoid this complexity by simply using the IRS rate.

A Fixed and Variable Rate (FAVR) plan is an alternative to the standard cents-per-mile reimbursement. Under IRS Revenue Procedure 2019-46 (and subsequent updates), a FAVR plan separates vehicle costs into two components:

• Fixed costs: A periodic allowance covering ownership costs like depreciation, insurance, registration, and taxes. This amount is the same each month regardless of miles driven.
• Variable costs: A per-mile rate covering operating costs like fuel, maintenance, and tires. This varies based on actual business miles driven.

FAVR plans are more equitable than a flat per-mile rate because they account for the reality that vehicle costs are not purely variable. An employee who drives 5,000 miles a year still pays insurance and depreciation; under a standard cents-per-mile plan, they would be under-reimbursed for those fixed costs. Conversely, high-mileage drivers are often over-reimbursed under a flat rate because fuel and maintenance costs per mile decrease at scale.

FAVR plans are complex to administer. They require annual vehicle cost surveys, geographic cost adjustments, and regular rate recalculations. They also require that all covered employees drive a minimum number of miles (typically 5,000 per year). For these reasons, FAVR plans are most common in large organizations with dedicated fleet management teams. Smaller organizations typically find the standard mileage rate simpler and sufficient.

Like the standard rate, FAVR reimbursements under a properly administered plan are tax-free to the employee and deductible by the employer.

The accountable plan rules require substantiation — employees must submit mileage logs with date, destination, business purpose, and miles driven within 60 days. When your team is using spreadsheets, paper forms, or email-based reporting, three problems consistently emerge:

The root cause is that manual processes put the compliance burden on the employee — the person with the least incentive and time to maintain perfect records. Automated mileage tracking apps solve this by capturing trips in real time via GPS, eliminating the need for manual entry and the opportunity for inflation.

Most organizations default to the IRS standard rate of 72.5¢ per mile because it is simple, defensible, and tax-efficient. But it is worth understanding what that rate covers and whether it is appropriate for your team.

The IRS rate is designed to cover the average cost of operating a vehicle for business, including fuel, depreciation, insurance, maintenance, tires, and registration. It is calculated using data from an annual study of fixed and variable vehicle operating costs conducted by an independent contractor for the IRS.

There are situations where the IRS rate may not be the best fit:

• High-cost geographic areas: Employees in cities with high fuel prices and insurance premiums (San Francisco, New York) may find the IRS rate insufficient. A FAVR plan with geographic adjustments may be more equitable.
• Low-mileage employees: Workers who drive fewer than 5,000 business miles per year have proportionally higher fixed costs per mile. The IRS rate may under-compensate them.
• Specialized vehicles: If employees are required to use specific types of vehicles (SUVs for equipment, trucks for materials), operating costs may exceed the standard rate.

Regardless of the rate you choose, the key is consistency and documentation. Apply the same rate to all similarly situated employees, document the rationale, and ensure the rate is reviewed annually when the IRS publishes its updated figures.

The reimbursement rules differ significantly depending on whether the worker is a W-2 employee or a 1099 independent contractor. Getting this distinction wrong can create problems for both parties.

The practical implication: if you work with a mix of employees and contractors, you need two different systems. Employees go through your accountable plan. Contractors handle their own mileage tracking and deductions — though you can recommend tools like tiktraq to help them stay compliant. For a deeper look at contractor deductions, see our gig worker tax guide for 2026.

Understanding the tax treatment of mileage reimbursement requires looking at both sides of the transaction.

The math overwhelmingly favors an accountable plan. Every dollar shifted from non-accountable to accountable saves the employer 7.65% in FICA and saves the employee their marginal income tax rate plus 7.65% in FICA. For a company reimbursing $500,000 annually in mileage, the difference between an accountable and non-accountable plan can exceed $75,000 per year in total tax savings across both sides.

Every section of this guide describes a compliance requirement that creates administrative work: collecting mileage logs, verifying business purpose, meeting submission deadlines, calculating reimbursements, and keeping records for audits. tiktraq for Teams was designed to handle all of it automatically.

The result: your reimbursement program operates as a compliant accountable plan with minimal human effort. Employees are paid accurately for exactly the business miles they drive. Finance teams save hours per pay period. And your organization maintains audit-ready records at all times. To see how tiktraq stacks up against other solutions, visit our mileage tracker comparison page.