What Is a Car Allowance?

Instead of owning company cars, a company may choose to give their employees a car allowance to cover the typical costs associated with a vehicle they already own or will purchase, as long as they use it for business purposes. This allowance covers the cost of leasing or buying the vehicle plus maintenance, fuel, insurance, wear-and-tear, and depreciation. It’s a one size fits all solution. 

Since car allowance is a benefit, it typically comes specified in the employee’s contract and is paid out with the salary. Employers pick a number and use that monthly, without accounting for month-to-month variability or different fuel expenses and mileage across employees. While car allowances provide a simple solution to business miles, it  may not be the most accurate way to compensate your employees.

You should consider if a car allowance is the right choice for your business. Weigh the  pros and cons of car allowance and compare it to different company vehicle options so you can find the best fit for your company and employees.

How much car allowance should you be giving your employees? Having multiple data points can be helpful to calculate the car allowance rate as accurately as possible. Start by asking how much your employees are driving. Take note of this, along with researching the average price of gas and vehicle maintenance. 

If you want to keep the calculation as simple as possible while staying relatively accurate, you can determine your car allowance rate by looking at the average miles driven by your company’s mobile workforce and multiplying that by the IRS mileage rate.

Keep in mind that compensating all drivers fairly is the greatest challenge that comes with offering a flat rate. There is a lot of variability across regions and states, as well as across employees driving different distances so many companies opt to offer the industry average year after year. To keep the calculation as accurate as possible and  compensate your employees fairly, take into account both fixed costs (insurance, depreciation, taxes, and fees) and variable costs (fuel, oil, tires, maintenance). 

How much is a typical car allowance?

The average car allowance in 2023 is $575. Surprisingly, this amount hasn’t changed much over the last few years, while the costs associated with owning and driving a vehicle have increased. 

Since the stipend provided is not linked directly to the specific mileage that workers are driving, car allowances are taxable. Without mileage records, the IRS views car allowances as additional income, which means the stipend provided is taxable at the normal income rate for each employee. While car allowance programs are simple to manage and offer flexibility for the employee to drive their own vehicle, they come with the hidden cost of tax waste. 

Tax waste is the money that gets taxed away before the employee receives the car allowance. It comes at a cost for both employer and employee.The employer has to account for the part of the income that the employee won’t receive when deciding a flat rate for car allowance, and the employee will not get the full compensation for their driving. For example, if an employer uses the average flat rate of $575 per month, the employee is likely to receive less than $400 in their bank account after taxes, ultimately making the stipend lower. 

You can provide tax-free car allowances to your employees by keeping mileage logs, which allows you to keep track of the portion of the employee’s allowance that isn’t taxable. Whether you prefer to keep car allowance as simple as possible, or try to reduce the tax waste, depends on the resources you want to spend on your business’ mobility.

There are many great alternatives to car allowance that can keep your mobile workers on the road at a lower cost or reduce hassle for you. We have seen that a fixed-rate stipend has an advantage: simplicity. However, it is not always the fairest solution for your employees, who may have to cover the remaining costs out of pocket. Here are some potential alternatives. 

Buying or leasing a business vehicle

Acquiring a business vehicle has some perks for both the company and employees. Your employees won’t have to accumulate wear-and-tear on their personal vehicle and will feel more comfortable driving longer distances. A company car also allows for some room for customization so you can advertise your brand. Additionally, a company car comes with tax benefits that you wouldn’t be able to enjoy through a car allowance program. Learn more about writing off a car lease for your business here.

FINN car subscription

If having a company car sounds like an attractive solution, but you don’t want to attach your business to the long-term commitment of buying a car, a FINN car subscription might be the right fit for you. A car subscription is more flexible and convenient than traditional car buying or leasing. FINN offers six to 12 month subscriptions for your business car, with the option to cancel or swap your vehicle for a new car at the end of your contract. Other perks include all-inclusive billing so you don’t have to worry about the cost of wear-and-tear, depreciation, and maintenance, and a dedicated fleet advisor to support you along the ride.

Mileage reimbursement

Through a mileage reimbursement program, employers reimburse employees at a cents-per-mile rate. Mileage reimbursement programs are popular because they offer a more accurate compensation for business driving, and they are not taxable as long as you adhere to the IRS mileage rate guidelines. Some main drawbacks of this alternative include the effort of keeping mileage logs, and the employee having to use their personal vehicle without the reimbursement of any associated costs besides fuel.

FAVR

Fixed and variable rate (FAVR) reimbursement fills in some of the gaps of a mileage reimbursement program. Through a FAVR program, companies reimburse drivers for the overall cost of using their personal vehicles because it takes into account both fixed and variable costs, instead of only a cents-per-mile rate. FAVR also allows you to tailor each reimbursement to the specific employee receiving it. The main challenge with this type of program is a more complex setup and maintenance.

• Fixed costs: Typically account for depreciation, insurance, taxes, and other fees.

• Variable costs: Is based on the business miles driven and the region, including fuel, wear-and-tear, and maintenance costs.

A one-size-fits-all solution for your mobile employees may be a very simple way to get your company started, but it can come at the cost of employee dissatisfaction and decreased productivity. If your car allowance isn’t covering all the costs associated with business miles, your team may end up choosing to drive fewer miles so they have fewer expenses. Also, a car allowance is considered additional income and will be taxed at the standard rate, which will result in the need for a higher stipend, affecting both the company and employee. 

If you are eager to explore more flexible and cost-efficient solutions, you could consider getting a company car. A company car eliminates the need to drive personal vehicles for work and offers tax benefits for your business. If you’re worried about unused depreciating cars sitting in your lot, or are looking for simplified billing, a FINN car subscription may  be the most convenient solution for you.