Many organizations use the IRS’s standard mileage rates to calculate deductible vehicle costs and reimburse employees tax-free for business use of their personal vehicles. For 2020, the rates are 57.5 cents per mile driven for business, 17 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

The standard rates offer simplicity, but if you use the same rate for all employees, across all geographic areas, some employees will be over-reimbursed and others will be under-reimbursed (which can result in litigation). The standard rate is based on national averages, and doesn’t account for gas prices and other variable costs that change over time, nor does it reflect costs (such as insurance) that vary from state to state.

Although more complicated, other methodologies — such as the fixed and variable rate (FAVR) methodology — produce more accurate results and more favorable tax treatment. Under FAVR, employers reimburse individual employees based on their actual costs of owning and driving their vehicles for business. This includes a portion of employees’ fixed costs — such as insurance, taxes and depreciation — as well as variable costs, such as fuel and maintenance, that depend on the number of miles driven. For purposes of computing FAVR reimbursements, a vehicle’s cost may not exceed a maximum amount set by the IRS ($50,400 in 2020). Certain other requirements also apply.

FAVR, which is the only methodology endorsed by the IRS, also allows both employers and employees to avoid taxes on reimbursed amounts.