Rising IRS Mileage Rates: Employer Reimbursement Practices May Need a Tune-Up

Takeaways

• Effective 07.01.26, the IRS optional standard mileage rate for business use increased to 76 cents per mile. 
• The FLSA does not mandate mileage reimbursement at the IRS rate, but unreimbursed or under-reimbursed vehicle expenses may create minimum wage or overtime exposure if they reduce nonexempt employees’ wages below required levels. State expense-reimbursement laws may impose broader obligations.
• This midyear rate adjustment serves as a reminder for employers to ensure their reimbursement practices account for employees’ work-related vehicle costs.

Related links

• Internal Revenue Bulletin No. 2026-29, July 13, 2026
• Sixth Circuit Rejects Two Methods for Computing Workers’ Vehicle Expenses for Minimum Wage Purposes

Article

The Internal Revenue Service (IRS) has raised the optional standard mileage rate for business use of an automobile for the second half of 2026. Effective July 1, 2026, the business mileage rate increased from 72.5 cents per mile to 76 cents per mile. Employers that utilize the IRS rate for employees’ mileage reimbursement should adjust their reimbursement policies to track the IRS rate.

Federal Wage and Hour Considerations

The Fair Labor Standards Act (FLSA) does not require use of the IRS rate for reimbursement of mileage costs. Unreimbursed or under-reimbursed business expenses, however, can create minimum wage and overtime liability if those expenses effectively reduce a nonexempt employee’s wages below the required minimum wage.

In a pair of 2024 decisions, the U.S. Court of Appeals for the Sixth Circuit rejected the automatic use of the IRS mileage rate for determining whether delivery drivers’ vehicle expenses resulted in minimum-wage violations. The court rejected the Department of Labor’s Field Operations Handbook (FOH), which says the IRS rate can be used for FLSA purposes where actual costs are not available. (See Sixth Circuit Rejects Two Methods for Computing Workers’ Vehicle Expenses for Minimum Wage Purposes.)

The Sixth Circuit also rejected an employer’s generic “reasonable approximation” approach to reimbursing vehicle expenses. While the appeals court decisions struck down both reimbursement approaches, it did not offer a single, FLSA-compliant formula in their place to calculate vehicle expenses, underscoring the need for employers to implement an expense reimbursement method that reasonably approximates actual expenses.

State Law Reimbursement Requirements

State law may impose broader obligations. Several jurisdictions, including but not limited to California, Illinois, and Massachusetts, require reimbursement of necessary business expenses, which can include an employee’s business use of a personal vehicle. State laws generally do not make the IRS rate a universal statutory mandate, but the rate may serve as an important benchmark, safe harbor, or practical proxy for reasonableness.

Employers with operations in multiple states should evaluate flat mileage allowance, per-trip or per-delivery payments, or below-IRS mileage rates to determine whether they reasonably capture employees’ work-related costs.

What Employers Should Do Now

Employers whose reimbursement systems track the IRS rate should update them to reflect the July 1 rate and confirm that payroll and expense platforms apply the correct rate based on the date mileage was incurred.

Employers should treat the midyear increase as an opportunity to:

• Confirm that their reimbursement policies are current, documented, and defensible across the jurisdictions where employees drive for work. 
• Audit whether reimbursement rates are sufficient to avoid potential minimum wage or overtime exposure. 
• Review state-specific rules for employees who drive in jurisdictions with affirmative expense-reimbursement statutes.

Employers also should maintain accurate records of mileage, business purpose, dates expenses are incurred, and reimbursement calculations, particularly for lower-wage employees and employees whose driving is central to the job.

Please contact a Jackson Lewis attorney if you have questions about employee reimbursement requirements under federal and state laws, or other questions about wage and hour compliance.