California Mileage Reimbursement and Rates
California is one of three states in the US with laws mandating that businesses reimburse employees for expenses related to their duties or resulting from employer directives. These expenses include business travel that can be reimbursed on a cents-per-mile (CPM) basis if an employee uses their own vehicle. The exact guidelines regarding those reimbursements can be found in the California Labor Code Section 2802.
That means if your business operates in California, you are required to pay employees for work-related expenses. When it comes to employee travel reimbursements, employers have a few options for how to do it, including the CPM method, actual expenses method, lump sum, and FAVR (fixed and variable rate).
On top of that, businesses must remember the four-year statute of limitations for filing expense reports.
California law requirements for mileage reimbursement
California law, specifically the California Labor Code Section, mandates employers to reimburse employees for necessary expenses incurred while performing their duties. It includes any type of work-related travel with the exception of daily commuting to and from work.
A company that doesn’t follow those rules can face several consequences, including claims for unpaid reimbursements for expenses and travel hours, penalties, and legal fees.
There are a few options for businesses on how to reimburse their employees, so companies can choose the best for their situation. However, the reimbursement method selected must adequately cover all vehicle expenses incurred by the employee while performing their job duties.
It's important to note that reimbursements for employees using their private vehicles for work are mandatory in California. The exact rules for mileage reimbursement depend on the employer's policy and should be clarified with the employer.
Methods of mileage reimbursement in California
The most common reimbursement methods employers in California can use to compensate employees are:
- Actual expense method
- FAVR (fixed and variable rate) Method
- Lump sum method
- Cents-per-mile (CPM) method
Each of these has its own set of features, benefits, and potential challenges.
Actual expense method
The actual expense method is a comprehensive approach that requires employees to record all vehicle-related expenses, including gas, repairs, and supplies. On top of that, they need to track mileage, including information about trip purpose, dates, and destination.
This method is known for its accuracy as it precisely reflects the actual costs incurred by the employee. However, this method can potentially lead to disputes over what constitutes “reasonable and necessary” expenses as per Labor Code 2802. For example, employers may question the grade of gas used, the choice of mechanic for maintenance, and other similar variables if the expenses go beyond what’s considered reasonable. Similarly, there may be more scrutiny from the IRS if employers are reimbursed for travel that’s not considered ordinary for the industry.
While the Actual Expense Method can be time-consuming and may lead to disputes, it ensures that the reimbursement covers all costs of owning and operating a personal vehicle for business use, including:
- depreciation
- insurance
- fuel
- maintenance
- tires
- and much more
FAVR method (Fixed and Variable Rate Reimbursement)
The FAVR Method is a more sophisticated approach to cents-per-mile CPM reimbursement. This method separates vehicle expenses into fixed costs (like insurance, depreciation, taxes, registration, and licenses) and variable costs (like fuel, maintenance, oil, and tires).
This method reflects actual and local gas prices, which helps avoid over or underpayment. A FAVR plan can reimburse both low-mileage and high-mileage drivers accurately and equitably as the fixed portion of the reimbursement is not tied to the miles driven.
While the FAVR method is non-taxable, it is quite complex to administer and often requires the assistance of specialized partner organizations to manage the process effectively and affordably.
Lump sum method
The lump sum method, also known as the “gas stipend,” involves paying a fixed monthly amount to employees to cover vehicle use costs. It’s a very straightforward method, often chosen by companies that prefer to keep things simple, as it doesn’t require mileage tracking or recordkeeping.
Under this method, employees receive a car allowance, gas allowance, or per diem payment, making the process hassle-free.
However, while the lump sum payment method offers simplicity, it brings its own challenges. The crucial concern is ensuring that the fixed payment fully covers the employee's actual vehicle operating costs to meet state laws.
If an employee unexpectedly racks up a high mileage during a period, the fixed sum might prove inadequate, potentially leading to disputes. That’s why businesses opting for this method need to be cautious with undercompensating employees.
Cents-per-mile method
The cents-per-mile (CPM) method is also quite simple, but mileage tracking is required. Using this method, employees are reimbursed based on a fixed rate per mile driven. Usually, companies use the standard mileage rate, which was set at 67 cents per mile for 2024. As long as the reimbursement rate is at or below the standard rate, employees can be reimbursed tax-free.
Its appeal lies in its simplicity. It’s a straightforward solution for both employers and employees and it eliminates the necessity for complex expense tracking while offering a standardized and easily calculable process.
California business mileage rate 2024
The standard mileage rate provided by the Internal Revenue Service is a fixed per-mile amount that businesses and self-employed people can use to get tax deductions or provide tax-free mileage reimbursements.
The IRS regularly updates this rate to reflect vehicle-related expenses such as gas, maintenance, depreciation, and insurance. The standard mileage rate for business use is set at 67 cents per mile in 2024.
The rate has been growing for the last few years:
- 2023: 65.5 cents per mile
- 06/2022-2023: 62.5 cents per mile
- 01/2022-06/2020: 58.5 cents per mile
- 2021: 56 cents per mile
The slight increase from previous years can be attributed to higher gas prices, inflation, insurance premiums, and other vehicle-related costs.
What does cents-per-mile (CPM) reimbursement cover?
CPM reimbursement using the standard mileage rate is designed to cover the costs of owning and operating a vehicle for business purposes. These can include:
- Fuel
- Maintenance
- Insurance
- Depreciation
- Registration fees
- Tires
The standard mileage rate is updated yearly to reflect those costs accurately.
However, if a company decides to provide vehicle reimbursements using the actual expense method, employees will have to keep receipts for every vehicle-related expense. This method may result in higher and more accurate reimbursements, but it is significantly more burdensome for employees and businesses.
Recordkeeping requirements for reimbursement
In the case of CPM reimbursement, employees must track mileage and include information about each trip’s starting and ending point, date, and business purpose. Mileage-tracking apps like MileIQ can make this process much easier — MileIQ drivers don’t even need to remember to start or stop tracking a drive because the app does it automatically.
For the actual expenses method, the job is significantly more complicated. In addition to mileage tracking, employees must keep all the receipts for repairs, gas, etc.
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