Finance and operations leaders often ask us when to pay the IRS standard Cents per Mile rate to their company drivers. We tell them when it is...
IRS Cents per Mile rate to be 62.5¢ July 1st
For the first time in over a decade, the IRS has announced a new optional standard mileage rate of 62.5¢ for the rest of 2022 to reflect the rising cost of driving.
IRS Cents per Mile rate to be 62.5¢ July 1st
The IRS has adjusted their optional Cents per Mile (“CPM”) rate. Last week, they announced a new optional standard mileage rate of 62.5¢ for the rest of 2022. This is the first time a mid-year change has occurred since 2011. The hike of 4¢ reflects the rising cost of driving. The new rate will take effect on July 1st.
The optional standard mileage rate is the maximum rate you can reimburse an employee for a mile they drive on business. When they bring their personal car to work, you can repay them, starting July 1st, 62.5¢ for every mile they drive. If they drive 100 miles, you can give them $62.50 tax-free with their next paycheck.
It is “optional” because employees can also receive less tax-free. They will be taxed, however, on any overage. If a driver covered those same 100 miles, but you reimbursed them $75, the $12.50 overage would be assessed for tax at the rate relevant to them, i.e. at their personal tax rate.
It is very unusual for the IRS to increase the rate mid-year. When the decision was made to do so before July 31st of 2011, it was similarly due to rapidly rising fuel prices. On the following chart, you can see a sharp increase from December of 2010 of about $3 per gallon to nearly $4 per gallon by mid-2011. That year, the rate increased from a 51¢ per-mile reimbursement to 55¢.
Notice also the change in the rate in 2008: in December of 2007, the national average gas cost was just over $3 per gallon. By June, it was over $4.10. That year, the IRS raised their rate by 8¢—more than double the hike we saw last week—from 50.5¢ to 58.5¢.
2022 started at 58.5¢, but will continue on at 62.5¢.
Is the optional standard mileage rate best for drivers?
Some companies pay all of their employees the standard mileage rate to drive for work. However, there are better options for reimbursement. Fixed and Variable Rate (“FAVR”) programs include a variable rate that adjusts every month to variable driving expenses like fuel.
Drivers on FAVR programs have already been getting fair reimbursements as prices have been rising. What is more, FAVR reimbursements are based on drivers’ zip codes, so West Coast drivers get West Coast reimbursements, and Gulf Coast drivers get Gulf Coast reimbursements. It is not fair to pay someone the standard mileage rate, based on the national average fuel cost, when they are paying over $5 per gallon in California. Nor is it fair to the employer to reimburse for $4+ per gallon to a Gulf Coast driver who is getting the best deal in the country.
A FAVR program is fair and neutral: it is neither a reward nor a punishment for driving; its purpose is to reimburse precisely, accurately, based on the price of gas at an exact location.
Drivers on FAVR programs have already seen their reimbursements go up in accordance with the local increases in their driving expenses. They did not need to wait for new IRS guidance, but have already been using technology and data to fight the rising cost of driving.
FAVR also protects companies in the event that gas prices begin to fall. The Energy Information Administration has predicted that crude oil prices will fall in the second half of 2022, meaning that FAVR rates will also come down. It is unlikely, however, that the IRS will again revise their standard mileage rate, leaving companies that use this reimbursement method on the hook for more than necessary.
When is it useful to pay Cents per Mile (“CPM”)?
There are certain cases when employers should pay the IRS standard mileage rate. Most especially when drivers only use their personal vehicle for work occasionally.
In order to qualify for a FAVR program, drivers need to cover a certain number of miles per year. Normally, this is at least a few thousand miles.
When you are driving a few thousand miles per year for work, it is safe to say that this is one of the core aspects of your job. If you are covering less than that, this might not be so. But if your employer requires you to supply and drive a vehicle for work, and you are only covering a few miles per year, you are not getting enough money to cover your car expenses.
Let us say, for example, that your employer has asked you to have a car for work. However, you only drive 100 miles per month. Your reimbursement of $62.50 is not going to cover your car expenses for that month—not even close. Most gas tanks now cost more than that to fill. Depreciation on a new car is more than that; so is insurance.
FAVR includes a fixed rate, independent of miles driven, to cover things like depreciation and insurance. That way, if you do not happen to cover many miles, your employer still takes responsibility for the car that they required you to supply.
So the best use case for the Cents per Mile rate is when an employee just happens to have a car—it is their personal car that they perhaps commute in, or have at home for their family. If you, the employer, need a quick job done—maybe you ask them to pick up a catered lunch, or some photography equipment for a staff photoshoot—then you can reimburse them for that trivial expense using the CPM rate.
A very occasional driver is well served by this tool. Anything beyond that is a job for FAVR.
Watch Mike Levine, Co-CEO of Cardata, discuss Cents per Mile on our YouTube Channel:
Midyear IRS mileage rate increase follows precedent, recent pleas | Journal of Accountancy