How do you know if your company vehicle allowance amount is fair to employees? The answer is not to compare it with the average vehicle amount nationwide.

How much is a typical vehicle allowance?

If you do a Google search for "How much is a typical vehicle allowance?" you'll find a range of answers from different websites. But the consensus seems to be that the average car allowance is around $575 or $600 per year. 

Interestingly, the 2020 mBurse car allowance survey found that most respondents reported a similar amount for their organization. Yet inflation has increased significantly in that same period. Using data from the Bureau of Labor Statistics, a $600 vehicle allowance in December 2023 was only worth $509.49 in December 2020 dollars.

Chances are, the "typical" vehicle allowance is not a fair vehicle allowance for all employees. If your organization has not adjusted its allowance in response to the inflation of the past three years, there is a good chance you are not paying an allowance amount that is fair to your employees.

What is a fair vehicle allowance for 2024?

In short, a fair vehicle allowance should reasonably offset employees' business vehicle expenses who drive a personal vehicle for work. Calculating these expenses can be challenging, so we created a guide that addresses this issue: 2024 Car Allowance Policy: Calculate the Right Amount. Or you can try out our three-step process to determining the best 2024 car allowance for your organization:

Or just read on for tips to determine what a fair vehicle allowance would be for your employees since different organizations will have different vehicle expense needs among their employees. These differences are based on variables like whether the allowance is taxed, where the employees work, and how much and how often they drive for work.

Tip #1: A fair vehicle allowance is calculated after taxes

Most vehicle allowances are treated as taxable income by the IRS. Unless an organization uses an IRS-approved accounting procedure to substantiate the business use of the vehicle expenses, that organization should be withholding both income and payroll taxes from the amount.

To determine whether your company vehicle allowance is fair, start with the after-tax amount. Taxes could often eat up 30-40% of the overall amount. That $600/month allowance (which is really only worth $509 in yesterday's dollars) might shrink to as little as $360! (And $360 is only $305 in 2020 dollars.)

The easiest solution is to switch to a non-taxable vehicle allowance. The most accurate and equitable non-taxable plan is the fixed and variable rate allowance. This IRS-recommended method is known as FAVR and has been growing in popularity in recent years.

Tip #2: A fair vehicle allowance factors location-based costs.

If an organization is based in one region and all its employees live and work there, then one vehicle allowance amount might be fair to them. However, if the organization has employees working in multiple states or across the country, those employees will be subject to location-based cost differences.

Gas prices and auto insurance premiums vary from city to city and state to state. Other costs, including maintenance costs, taxes, and license and registration fees, also vary. 

If an organization operates within one region, the expense needs of its employees can be calculated based on the prices it pays for business vehicle expenses. However, if the organization is widespread, a more varied approach to the vehicle allowance is necessary to deliver a fair amount to everyone. That is another strength of FAVR vehicle allowances—they are calculated based on each employee's zip code.

[Read more: Everything Your Business Needs to Know about FAVR]

Tip #3: A fair vehicle allowance factors in mileage differences.

Even if two employees are based in the same region, they may incur business vehicle expenses at different rates depending on how much they travel. If one driver covers a larger territory or makes more frequent trips, that driver will accrue a much higher amount of mileage. This will increase expenses, particularly expenses related to fuel, wear-and-tear, and routine maintenance.

Does it seem fair for those two employees to receive the same vehicle allowance amount?

That high-mileage driver will experience a financial pinch if the allowance amount is not calculated with those mileage-based expenses in mind. On the other hand, if the organization pays a fair allowance amount to that high-mileage employee, the low-mileage driver will be paid more than is necessary.

This is why a FAVR vehicle allowance integrates a mileage rate into the monthly allowance amount, helping to ease the differences in costs between drivers who drive different amounts.

Adopting and maintaining a fair vehicle allowance

In summary, a fair vehicle allowance covers the vehicle costs incurred by employees who drive a personal vehicle for work. A fair allowance amount is calculated after taxes – or, even better, is paid tax-free. A fair allowance amount is also calculated based on current vehicle costs in each location where employees work. Finally, a fair allowance amount is calculated for differences in miles employees drive.

Because of these complicated factors, making a blanket statement that $X is a fair vehicle allowance amount is impossible. This is why many organizations partner with vendors to generate fair vehicle allowance rates using vehicle expense data for different locations. Contact us today to learn more about the vehicle allowance support services offered by mBurse. You can also start by comparing your current program to a sample FAVR program below.