Reimbursing drivers who use their own car: IRS mileage rates and state reimbursement laws

What the law requires and what is a tax choice

Federal law does not make you pay a set amount per mile when an employee drives their own car on ambulatory or sedan runs. Three separate rules decide what you owe and how it is taxed:

• The minimum wage floor. Under the Fair Labor Standards Act, car costs a driver carries for your business count against their pay. If those costs push pay below minimum wage, or cut into overtime, you owe the difference.
• State reimbursement laws. California, Illinois, Iowa, New Hampshire, Montana, South Dakota and North Dakota have statutes on repaying employees’ work expenses, and each one reaches a different set of costs.
• IRS rules. The IRS business rate sets the most you can pay per mile without it becoming taxable wages, provided the driver keeps a log and you follow accountable plan rules.

These rules are separate. A plan can be tax-free and still leave a low-paid driver under minimum wage, or meet the wage floor and still be taxed as pay. Check a plan against all three before drivers start using their own cars.

This page is about employees. A driver paid as a contractor usually carries their own car costs, and the IRS lists whether expenses are reimbursed among the financial facts it weighs when deciding if a worker is really an employee. The employee or contractor guide covers that test. Rider mileage paid by Medicaid to a family member who drives is a different program, explained under mileage reimbursement.

The 2026 IRS rates changed on July 1

The IRS business standard mileage rate for 2026 started at 72.5 cents a mile (Notice 2026-10). Announcement 2026-11, published in the July 13, 2026 Internal Revenue Bulletin, raised it to 76 cents for the rest of the year, citing recent increases in the price of fuel. The medical and military moving rate rose from 20.5 to 23.5 cents at the same time. The charitable rate stays at 14 cents because a statute sets it.

The timing rule decides which rate applies to a given check:

• Miles driven before July 1, 2026 use 72.5 cents, even if you pay them later.
• An allowance paid on or after July 1 for miles driven on or after July 1 can use 76 cents.

Mid-year changes are rare but not new. The IRS did the same in 2011 and in 2022. The 2026 rate was announced at the end of December 2025, so expect the 2027 rate around the same time and update your policy when it comes out.

Each year the IRS bases the rate on a study of what it costs to own and run a car. Those costs include depreciation, maintenance and repairs, fuel, oil, insurance and registration. It applies to electric and hybrid cars as well as gas and diesel. Parking fees and tolls for business trips are separate, so a policy can reimburse them on top of the mileage rate.

Accountable plan rules that keep it off the paycheck

Mileage money stays out of the driver’s wages only when it is paid under an accountable plan, as defined in 26 CFR 1.62-2. The plan has three requirements:

1. Business connection. You pay only for driving done for your business. When reimbursement goes out with the paycheck, it has to be separately identified, not folded into the wage line.
2. Substantiation. The driver gives you a record of each business use: the date, the miles, where they went, and why. IRS rules accept a log, trip sheets or a similar record kept at or near the time of the trip, and a log kept weekly counts as timely.
3. Return of excess. Any advance beyond the logged miles must come back within a reasonable time.

The regulation gives safe harbors for the timing: a log turned in within 60 days of the driving, an advance paid no more than 30 days before the cost, and excess returned within 120 days. Payments that miss these rules are taxed as wages, with withholding, FICA and FUTA.

Under Rev. Proc. 2019-46, a mileage allowance is treated as substantiated up to the IRS rate times the logged business miles. Pay 80 cents a mile in October 2026 and the 4 cents above 76 cents is wages for every logged mile. A flat monthly allowance can still be partly tax-free if the driver keeps a log, but you have to compare the allowance with the rate times the logged miles at least quarterly and run any excess through payroll.

Two arrangements fail the test entirely. An amount paid whether or not the driver drives for you, such as a fixed $200 car allowance with no log, is a nonaccountable plan. Reimbursing commuting miles also fails, because commuting is not a deductible business expense, so that part of the payment is wages.

Getting this right matters to drivers as well. IRS Publication 463 explains that most employees cannot deduct unreimbursed work expenses on their federal return under current rules. A driver who gets a taxable allowance pays tax on money that went into gas and tires and cannot write off those costs.

Choosing a method

A fixed and variable rate (FAVR) allowance is a fifth option for larger programs. It pays a fixed amount for ownership costs plus a per-mile amount for running costs, and it carries its own limits: at least five employees covered at all times, at least 5,000 business miles a year per driver, and a car whose new price was at least 90 percent of the standard car the plan is built on. For 2026 the IRS caps that standard car at $61,700. Few NEMT fleets running a handful of sedans will find it worth the setup.

The federal minimum wage floor

Wages under 29 CFR 531.35 count only when the employee receives them free and clear. When a job requires the employee to supply something the work depends on, and paying for it leaves the employee short of the minimum wage or the overtime owed, the employer has broken the law for that week. A car you require for sedan trips works the same way.

The Labor Department can measure the car cost with the IRS rate. Its Field Operations Handbook (section 30c15) lets investigators use the IRS business rate in place of a driver’s actual costs when checking minimum wage, whether or not the driver could deduct the expense. The handbook gives pizza delivery drivers as the common case, and a sedan driver on medical trips is in the same position.

Example: a low mileage rate that fails

A driver earns $12 an hour, works 40 hours, and drives 450 business miles in their own car in a week in October 2026. The company pays 20 cents a mile, or $90.

• Car cost at the IRS rate: 450 x $0.76 = $342.
• Unreimbursed cost: $342 - $90 = $252.
• Wages left after the car: $480 - $252 = $228, or $5.70 an hour.
• Federal minimum for 40 hours: 40 x $7.25 = $290.

The company is $62 short for that week, before any state minimum wage is applied. A driver on a higher hourly rate, or one with fewer miles, may clear the floor with the same 20-cent rate, so check the drivers with the most miles and the lowest pay first. In weeks over 40 hours, the unreimbursed cost also cannot reduce the overtime owed. The overtime guide covers how overtime is figured.

A reimbursement that reasonably matches the cost stays out of the regular rate used for overtime, and 29 CFR 778.217 treats travel reimbursements within IRS guidance as reasonable. The part of a reimbursement that is disproportionately large does count in the regular rate, and so does any payment for a driver’s ordinary commute.

Per-trip pay plans need the same check. If a per-trip rate is meant to cover the driver’s car, write down how much of each trip payment is for the car. California’s Supreme Court has said that folding expenses into higher pay satisfies its reimbursement law only when the employer can show which part is pay and which part is reimbursement.

States that require reimbursement

Several states have their own expense statutes. They range from a broad duty to cover every necessary cost of the job to a deadline for paying expenses you approved. Each protects employees, not contractors. If you run trips in one of these states, write a policy that meets it:

• California. Labor Code 2802 makes an employer cover every necessary expenditure or loss an employee incurs in doing the job, and section 2804 voids any agreement to waive it. In Gattuso v. Harte-Hanks Shoppers (2007), the state Supreme Court accepted three ways to pay for an employee’s car: actual expenses, a mileage rate, or a lump sum. An agreed mileage rate or lump sum does not end the obligation. A driver can show that real costs were higher and recover the difference, with interest and attorney’s fees. Labor agency letters quoted in the decision call the IRS rate presumptively reasonable. Under that position, an employer paying less carries the burden of showing the driver’s costs are lower, and a driver asking for more must prove higher costs.
• Illinois. Since 2019, 820 ILCS 115/9.5 has made employers repay reasonable work costs that are required by the job and primarily benefit the employer. The driver has 30 calendar days to turn in a claim with supporting records, or longer if your written policy says so. Your policy may cap what you repay, for instance with a per-mile figure, as long as the cap is more than a token amount. Losses from the driver’s own negligence are excluded by the statute.
• Iowa. Under Iowa Code 91A.3(6), costs you approved must be paid up front or no later than 30 days after the driver submits the claim, with a written reason for any part you turn down.
• New Hampshire. Under RSA 275:57, money an employee spends because the employer asked must be repaid no later than 30 days after the employee shows proof of payment. The statute carves out costs employees normally carry as a precondition of the job, which matters if you hire only drivers who already own a car. A willful violation can bring interest and a civil penalty of up to $1,000 per violation.
• Montana and South Dakota. Montana Code 39-2-701 and South Dakota Codified Laws 60-2-1 both require an employer to indemnify an employee for everything the employee necessarily spends in direct consequence of the job.
• North Dakota. Century Code 34-02-01 has the same indemnity rule, but it excludes the cost of buying or renting tools or equipment the employee also uses outside work. Get advice on how that exception applies to a personal car before relying on it.

Other states may have narrower rules or none. The federal floor still applies everywhere, and the phone guide shows how the same statutes apply to a driver’s personal phone.

Which miles to pay

Decide in writing which miles count, because commuting and business driving are treated differently for both tax and wage purposes.

• The drive to the first rider. IRS Publication 463 treats travel from home to the first business stop and from the last stop home as commuting when the employee has no regular office or home office. Reimbursing it is taxable wages.
• Miles between riders. Driving from one drop-off to the next pickup is business travel. That includes deadhead miles with no rider on board.
• A required stop at your office. If you make drivers check in at the office before the first pickup, the miles from the office onward are business miles.
• Personal stops. A detour for an errand comes out of the log.

The log can come from the trip records you already keep. What matters is that each entry shows a date, the miles, the places and the business reason, and that the driver gets paid for them on a set schedule. The mileage log template lays out the columns the IRS looks for.

Insurance follows the car

The mileage rate includes an average cost of insurance, but it does not make the driver’s personal policy cover paid passengers. According to a California Department of Insurance notice, the typical personal policy carries a livery exclusion, so a paid ride can fall outside the driver’s own coverage. The personal vehicle guide explains what brokers and states require on the policy, and hired and non-owned auto coverage answers for the company’s liability and does nothing for the driver’s own car. In California, a driver who has to buy costlier coverage to do your trips can point to that cost when arguing the reimbursement is too low.

What to put in the written policy

1. The rate, and that it follows the IRS business rate or a stated lower figure.
2. Which miles count and which do not, using the commuting rules above.
3. How drivers log miles, and that the log is due with each pay period.
4. When you pay: on the next regular payday, and never later than any state deadline.
5. That parking and tolls on trips are reimbursed with receipts.
6. That the payment appears as a separate line on the pay stub.
7. The insurance each driver must carry on their own car, and proof of it.
8. Who reviews the rate against the minimum wage floor each time the IRS changes it.

The driver pay guide covers the wage side of the plan, and the tax basics guide covers deducting the costs on the company’s return.

Logging miles and hours in HealthRide

HealthRide logs GPS-recorded miles on every trip and clock-in and clock-out times on every shift. The driver activity and timecard reports export each driver’s hours and miles for a pay period, so reimbursement starts from a recorded figure instead of a handwritten estimate. Decide which of those miles your policy pays, then check the totals against each driver’s pay for the week.