Car allowances remain one of the most popular ways for employers to offset their employees' business vehicle expenses. However, few organizations take time to calculate a fair amount based on employees' typical costs. Here's how to remedy that.
What is a fair car allowance amount?
A fair car allowance amount should cover all an employee's business-related costs associated with owning and operating their vehicle used for work. With inflation increasing 20-30% over the past three years for many vehicle-related costs, now is a great time to determine whether your company car allowance is fair.
In one mBurse survey, only 26% of the companies surveyed had based their car allowance amount on employee expense data (actual or estimated). Most said theirs was based on a competitor's amount or did not know how the number was calculated. This data suggests that many workers are not equitably reimbursed for their work-related car expenses.
What costs should a fair car allowance cover?
Expenses covered by a car allowance should include the business portion of the costs required to own and operate a vehicle used on behalf of an employer. A minimal allowance would be acceptable if an employee only drives occasionally to conduct company business. But if the employee drives daily, a robust allowance is necessary.
The following expenses can be considered business costs:
- Fuel
- Oil changes, tires, maintenance costs
- Auto insurance
- Depreciation
- Taxes, license, registration
The key is to figure out the business portion of the costs. If the employee drives every business day, that may be around 5/7, or 71%.
Tools for calculating a fair car allowance
Calculating what each employee should receive as a car allowance. However, there are tools to at least develop fair estimates based on where employees work and how much they drive.
The IRS releases a standard business mileage rate annually based on average costs. For 2025, this rate is 70 cents per mile. This rate can give you a ballpark amount, but only if your employees experience average costs and drive around 14,000 annual miles. Undoubtedly, different employees will drive different amounts of money; some may work in costly parts of the country.
A more effective method is to use our allowance calculator (above). By inputting some details about your existing car allowance, you'll obtain a data-driven car allowance that helps prevent overpaying or underpaying your employees.
You can also read and use the tools below to get a ballpark idea of an appropriate car allowance amount covering all work-related vehicle expenses.
1. Use the AAA gas map to calculate fuel costs for a car allowance
AAA Gas Prices has several useful tools to help you evaluate the sufficiency of your car allowance for particular parts of the country. The chief feature is the color-coded map of state average gas prices. This is important because different states experience very different gas prices.
The charts compare current price estimates to past prices and the price trend calculator. These tools can help identify the range of prices that mobile employees are likely to experience over time.
Once you understand the average gas prices in each region, you can create categories of employees based on how much or how little driving they do. Using one vehicle to estimate the costs would be the most suitable vehicle for the job. You can estimate fuel costs based on the vehicle's fuel efficiency and avoid calculating the actual costs of various employee vehicles.
2. Use RepairPal to project maintenance costs
Because employees are driving their vehicles a lot more than they would otherwise, it is appropriate for the company to cover their maintenance costs. Using a standard car of a certain age, you can generally predict the yearly maintenance costs for each band of miles driven. Divide it by 12, and you've got the monthly amount.
If you are looking to ballpark the costs, repairpal.com offers an estimator that captures the differences in what mechanics charge in different regions. The site's primary purpose is to help consumers check a mechanic's estimate against the reasonable range for a particular service or repair in that consumer's location. However, it can also predict routine maintenance costs a mobile employee will likely experience based on where they live.
For example, replacing the brake pads on a Honda Accord will cost between $503 and $609 in Des Moines, IA, but between $592 and $722 in San Francisco. That's a 17–19% difference that should be reflected in the car allowance amounts paid by a national company. This tool should give you some general ideas about determining maintenance costs.
3. Use Carinsurance.com to discover auto insurance rates
An employer should pay close attention to each employee's car insurance coverage. Failure to do so could leave the company liable in the case of an accident in which the employee's insurance cannot cover medical costs and property damage. It is vital to subsidize robust auto insurance coverage while the employees hazard their vehicle and the company name.
Car insurance rates vary significantly by state. Suppose you don't have access to actual auto insurance. In that case, the Average Car Insurance Rates calculator at CarInsurance.com is a helpful tool designed to give consumers a reasonable sense of the car insurance rates in their area. You can also use it to understand the car insurance rates your employees in different parts of the country are likely to experience.
If your company requires a specific minimum coverage (it should), make sure employees can afford it. The best practice is to require coverage of at least 100/300/50, but 250/500/100 is the best option to protect the company from liability in an employee-involved accident.
4. Don't forget to calculate depreciation, fees, etc.
The most significant expense of vehicle ownership is depreciation. By requiring employees to own and operate a personal vehicle for work, the company also assumes an obligation to subsidize this cost. Whether you calculate the business portion by the percentage of business miles out of total miles or by the percentage of time used for business (i.e., 5/7 or five out of seven days of the week), this business portion will comprise most of the vehicle depreciation.
Again, pick a standard vehicle of a maximum age appropriate to the job and use a free depreciation calculator to determine how much value it loses per year when you add up all the yearly depreciation amounts within that maximum age and divide by the number of years. The business portion of this average annual depreciation amount should inform the car allowance amount.
It is also possible to find the average costs of vehicle registration, license, and taxes across the country and factor these in. (And don't forget oil and tires—these contribute to business vehicle expenses as well!)
Calculating the taxes on a standard car allowance
If learning how to calculate a fair car allowance is starting to sound complicated, that's because it is. The issue of taxation further complicates matters.
In several states, individual vehicles are subject to ad valorem or personal property taxes. These rates differ by zip code; some states do not impose personal property taxes. Additionally, each county may have its own method for calculating these rates. While there isn't a centralized source for this information, you can visit the county website for an overview or more detailed information on how these rates are determined.
How to ensure a fair car allowance without spending hours calculating expenses
The most effective method for establishing a fair car allowance for employees is to utilize existing vehicle data collections that guide the appropriate allowance for a standard vehicle driven by a specific number of miles in a particular region of the country.
Pairing access to this data with an accountable, non-taxable car allowance can save the company a lot of money while delivering a more equitable vehicle reimbursement.
If you want an accurate car allowance rate based on data or are interested in third-party program administration, use the calculator below to see how much a reasonable car allowance would be this year.