Your employer may provide you with a car allowance or a mileage reimbursement to pay for the business use of your personal vehicle. If your job requires you to use a vehicle to carry out responsibilities, then it is right for the company to offset expenses. Some state laws even require it.
A car allowance is a periodic stipend paid to an employee for the use of a vehicle and is usually taxable. A mileage reimbursement is a cents-per-mile rate multiplied by the employee's monthly mileage amount. If equal to or less than the IRS standard rate, a mileage reimbursement is non-taxable.
A car allowance is a set amount that an employer pays to offset the business use of an employee’s personal vehicle. The employer pays the car allowance either monthly, bi-weekly, or weekly as part of the employee’s paycheck, making it taxable compensation. The car allowance covers vehicle expenses like fuel, insurance, and maintenance.
Example: Ryan is a sales rep for a manufacturing company. He drives his personal vehicle for business. His company provides $600 a month to cover these expenses. Each month he receives the same car allowance regardless of how many miles he drives or what his expenses are.
A mileage reimbursement is a type of vehicle reimbursement that pays a mileage rate multiplied by the employee's mileage over a period of time – often monthly. It requires the logging of business miles driven over that period of time, unlike a car allowance.
A reimbursement, unlike an allowance, does not compensate employees to offset expenses but actually pays back the employee for business use of a vehicle. Vehicle reimbursements require business substantiation via mileage or actual expenses. This is what keeps the reimbursement tax-free.
A vehicle reimbursement can come in different forms beside standard mileage reimbursements, which we'll explore below.
Mileage is the most common form of vehicle reimbursement. Many businesses establish a mileage rate that is less than the IRS mileage rate. Employees maintain a mileage log and are reimbursed either weekly, bi-weekly, or monthly depending on their employer.
Example: Dakota is a sales manager for a pharmaceutical company. Dakota drives her personal vehicle to different doctors’ offices for business while managing company sales representatives. Each month Dakota records her business mileage and is reimbursed $.35 for each business mile.
This is the best-known mileage reimbursement rate because it was the rate used for tax deductions as well as for federal workers. The IRS mileage rate is set every year in December, although the rate has changed mid-year three times in its history. The IRS mileage rate represents an average of last year’s vehicle costs across the country.
Example: Amanda works as a merchandiser for a large company. She drives her car to different locations each day and records her mileage. Each month she is reimbursed the set rate the IRS establishes. For 2024 the IRS mileage rate is $.67/per mile.
This is a hybrid car allowance/reimbursement. With this type of reimbursement an employer will create a preset car allowance that is paid each month. The car allowance amount is substantiated by the monthly business mileage multiplied by the IRS mileage rate. As long as the employee’s mileage times the IRS rate does not exceed the car allowance, then all of the mileage is substantiated.
Example: Finn works for a medical device company and receives a $600 / month mileage allowance to operate his vehicle. Each month Finn logs his business mileage and submits it to his employer, who multiplies the mileage against the IRS rate. If Finn’s mileage reimbursement amount exceeds the preset car allowance there is no taxation. If Finn’s mileage amount is less than the preset car allowance Finn will be taxed on the difference.
FAVR was designed by the IRS as a reimbursement for businesses. FAVR programs were designed for businesses to reimburse employees tax-free for both fixed ownership costs (insurance, license, taxes, depreciation) and variable operating costs (gas, oil, tires, maintenance). Localized cost data is used to pinpoint reimbursement rates for each individual employee.
Example: Todd is an account manager for a life insurance company and travels throughout the mid-Atlantic to maintain relationships with valued clients. He receives a fixed stipend and variable mileage rate derived from vehicle expense data for his home zip code in Virginia. He uses a mileage tracking app that syncs with his company expense system and is reimbursed tax-free with little administrative work on his part.
Employers provide a fuel card to offset the costs of gas. In most cases the fuel card is provided on top of a car allowance.
The short answer is yes. If you can’t substantiate and measure the business use the car allowance is taxed.
The IRS classifies car allowances and mileage reimbursements in two ways:
Because the tax reform eliminated the popular tax write off for unreimbursed business expenses, it is more important than ever to properly reimburse employees. But which approach carries the most advantages?
It's simple: you pay employees a flat taxable car allowance each month regardless of their expenses or their driving territory (mileage).
Again, it's simple: Mileage rates are easy to administer, and any rate under the IRS rate is non-taxable. The tax-free payments are the main advantage over car allowances.
It is easy to use because it is a published number, and it’s non-taxable.
It’s easy to provide a fuel card and can help offset the inherent inequities of a standard car allowance.
Should be administered by a third party. FAVR policies can be administered internally, but there are a lot of IRS requirements.
The answer is…whichever policy allows for full and accurate reimbursement of employees. Unfortunately, that eliminates the standard, taxable car allowance as well as the one-size-fits-all mileage rate. Instead, you need a non-taxable approach that is flexible enough to account for variations in employee expense needs.
With inflation affecting the cost of vehicle operation for business, employers are experiencing added pressure to fully reimburse expenses. If your organization continues to pay one rate or a car allowance your organization is exposed to:
The time is now to address the company's car allowance or vehicle reimbursement policy and stop paying an equal amount for an unequal expense. This would send a message of fairness to all employees. Here's a quick tool to help: