A Rare IRS Update Complicates Expense Reimbursements

A Blog by HR California

California law requires employers to reimburse employees for all necessary expenditures or losses the employee incurs in the performance of their job duties. One of the most common expense reimbursements is for an employee’s use of their personal vehicle. The usual way employers handle this reimbursement is through the IRS-established mileage rate for the deductible costs of operating a motor vehicle.

Usually, this rate is set to take effect starting on January 1 for the year. However, recent increases in fuel prices contributed to the IRS making a mid-year adjustment to the 2026 rate. Previously, the 2026 rate was 72.5 cents per mile, but effective July 1, 2026, it was increased to 76 cents per mile. This means that employers that use the IRS mileage rate for personal vehicle reimbursement need to make a mid-year change to its practices.

The biggest question from this change is whether California employers need to use this rate at all to meet their expense reimbursement obligations under the law. While the law doesn’t require the use of the IRS mileage rate for this purpose, the courts have endorsed this method as an easy-to-use approach.

If an employer chooses not to use this method, it must devise another method to reimburse its employee accounting for more than just the gas used. Vehicle reimbursements must also include considerations for all costs associated with operating a vehicle including depreciation of the value, insurance, repairs, tire wear, other maintenance issues, gas and oil.

CalChamber’s mid-year update was full of information employers need to use to audit and revise processes before waiting for the new year. As summer winds down, employers should continue to keep an eye on this space as the legislative session ends and new laws are enacted.

Matthew J. Roberts, Associate General Counsel, Labor and Employment