California Employers and the IRS Business Mileage Rate for 2023

The IRS business mileage reimbursement rate recently increased to $0.655/mile on January 1, 2023. Often employers want to know if they should automatically increase their own reimbursement rate to match this rate. While the quick answer is probably yes, we want to provide some background and information to help you with your decision.

There is no federal law that requires an employer to increase their mileage reimbursement rate to the rate set by the IRS. However, there is a requirement in certain states like California to reimburse employees for business expenses. In California, the law is very specific about this, as stated below.

CA Labor Code Section 2802(a) states that: “An employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.”

Reasonable Costs

Section 2802(c) de?nes “necessary expenditures” to include “all reasonable costs.” And reasonable costs are those required to do their jo

So in the case of some jobs, if driving is required and no vehicle is provided, then the employer has made vehicle ownership a condition of the employment. That would mean expense reimbursement to the employee should include car ownership expenses such as depreciation, taxes, car insurance, and registration. Also, adding business miles to the personal vehicle means faster depreciation and more frequent maintenance, including replacing oil, brake pads, and tires. Finally, car insurance and gas prices factor into the equation. These can differ by region and by how far someone travels for business.

The bottom line is for California businesses; if an employee is required to use their vehicle for business purposes, the expense should be reimbursed.

The most straightforward way for employers to fulfill the requirement to reimburse employees for using a personal vehicle is by using the IRS-set mileage rate for each mile driven on business. The company multiplies the employee’s monthly business mileage by a specific cents-per-mile rate and pays the resulting amount. As long as the payment does not exceed what the IRS has set as their rate, the payment is considered reimbursement and non-taxable.

Law Firm Merhab Robinson & Clarkson recently stated the new IRS mileage rate for California, if implemented, demonstrates adherence to California Labor Code Section 2802:

California Labor Code Section 2802 requires employers to reimburse employees for business expenses, and California courts have held that reimbursing employees’ mileage at the IRS Standard Mileage Rate complies with Section 2802 for business use of an employee’s personal vehicle. As of January 1, 2023, the Internal Revenue Service has increased the standard mileage rate to 65.5 cents per mile driven for business use.  Employers may reimburse employees who use their personal vehicles for business use at the updated standard mileage rate. These rates apply to electric and hybrid-electric automobiles, as well as to gasoline- and diesel-powered vehicles.

Employers can also cover this responsibility of reimbursing this business expense with a car allowance, a fuel card, or a combination of these. What employers decide depends on their business, the competitive offerings in their industry, market conditions, and what is practical for their organization. 

These other methods might be necessary for situations where roles require so much driving that if there wasn’t a car allowance or fuel card, just mileage reimbursement would not cover the car expenses for an employee and would cut into their compensation. This expense of driving could either bring their salary so low as to make the pay unlawful or create a situation where the expenses are so high that the amount taken from compensation does not make the job’s salary competitive.   

So while every organization should consider what is competitive and legal, for most organizations in California, a safe, simple minimum threshold would be to always reimburse at the IRS business mileage rate as reimbursement. 

Kelly Henry, SPHR

Ethos Human Capital Solutions, Principal Consultant

January 13, 2023