The IRS Just Changed the Mileage Rate Mid-Year. Here's What Contractors Need to Know.

If you pay your crew a mileage reimbursement for driving to jobsites, supply houses, or anywhere else for work, this affects you starting now.

On July 13, the IRS announced a rare mid-year change to the standard mileage rate. Starting July 1, 2026, the rate is $0.76 per mile, up from $0.725. The reason is fuel costs. Gas was around $2.89 a gallon when the IRS set the original 2026 rate back in December. By mid-July it was closing in on $3.90. The old rate stopped covering what it actually costs your crew to drive their own trucks for your business, so the IRS adjusted.

Mid-year changes like this almost never happen. The last one was 2022, when gas prices spiked after Russia invaded Ukraine. Before that you have to go back to 2011, 2008, and 2005. When the IRS moves mid-year, it means the cost of driving has genuinely shifted, not just wobbled.

So what does this mean for your business? There's good news and bad news.

The bad news: your cost per mile just went up almost 5%

If you reimburse at the IRS rate, every business mile your crew drives now costs you 3.5 cents more. That sounds small until you multiply it out. A crew member driving 300 miles a week costs you an extra $10.50 a week, or about $273 more over the second half of the year. If you have four guys driving like that, you just picked up $1,000 in unplanned cost for 2026.

Worth knowing for budgeting. Not worth panicking over. Because here's the other side.

The good news: mileage reimbursement is the best deal in payroll

Mileage reimbursement is one of the rare "too good to be true" things in tax law that actually is true. You can pay your employees, it's non-taxable to them, and you don't pay additional payroll tax on it.

Here's why. It is a reimbursement, not a wage. The money covers fuel, maintenance, and depreciation on your employee's personal vehicle when they use it for your business. The IRS doesn't treat it as income because your crew member is just being made whole for a cost they fronted on your behalf.

But your crew doesn't experience it that way. They just see more money in their check.

Compare that to a raise. When you pay wages, you're adding roughly 10-15% on top for payroll taxes and workers comp before a dollar reaches your employee. Then withholding takes a bite out of their end. A mileage reimbursement skips all of that.

The math

Take a crew member driving 300 miles a week between jobsites and supply runs.

At $0.76 per mile, that's $228 a week, tax-free, straight into their pocket.

Now try to put that same $228 in their pocket through payroll. It costs you over $250 once payroll taxes and workers comp pile on, and after withholding they take home a lot less than $228. Same compensation on the surface, worse outcome on both ends.

If you have crew members driving personal vehicles for work and you're not reimbursing mileage, you're leaving one of the cheapest ways to pay your people on the table.

How to do it right

The IRS gives you this deal on one condition: you can prove the miles were real and business-related. That means:

1. A mileage log for every trip, with the date, the miles, and the business purpose. An app like MileIQ handles this automatically. A notebook on the dashboard works too, as long as it gets filled in.

2. Only business miles count. Commuting from home to a regular shop or office doesn't qualify. Driving between jobsites, to supply houses, and to customer locations does.

3. Reimburse based on the log. Multiply the rate by the documented miles and cut the check.

   
   

Skip the documentation and the whole thing falls apart. Reimbursements without records get treated as wages, which means back payroll taxes for you and surprise income for your crew. The paperwork is the price of the deal.

The catch nobody is talking about: 2026 has two rates

This is the part that will quietly mess up contractor books this year.

Miles driven from January 1 through June 30 use the old rate of $0.725. Miles driven July 1 or later use $0.76. The rate follows the date of the trip, not the date you cut the check.

So if a crew member turns in a mileage report in August that covers June and July, those miles get two different rates. If your logs don't show trip dates, you have no way to split them, and your books will be wrong for one half of the year.

Three things to do this week:

1. Check that your mileage tracking captures trip dates, not just totals. Most apps do this by default. Spreadsheets and paper logs often don't.

2. Update the rate in your payroll or reimbursement setup effective July 1. It does not change automatically in most systems.

3. If any June miles are still unreimbursed, pay those at $0.725, not the new rate. The increase is not retroactive.

   
   

The bottom line

The rate went up, which costs you a little. But the bigger story is that mileage reimbursement remains the most tax-efficient dollar you can put in a crew member's pocket, and now there's 3.5 more cents of it per mile.

The whole thing lives or dies on clean records and the right rate applied to the right dates. That's bookkeeping, and it's exactly the kind of thing I handle for contractors every day. If you're reimbursing crews and want to make sure it's set up clean, get in touch.

Rules around reimbursement plans have specifics that depend on your situation. For anything beyond the bookkeeping side, loop in your CPA.