3 Questions to Determine How Much Car Allowance to Pay

Written by mBurse Team Member   |   Dec 26, 2022 9:00:00 AM
2 min read

Company car allowances are often some of the most overlooked policies in the organization. Here are three questions to help you assess what rate your vehicle allowance policy should pay.

How much does a typical car allowance pay?

Recent mBurse surveys found that most U.S. companies pay a car allowance between $500 and $700 per month. So right around $600 is probably close to average – though the amount varies between different industries and different roles within a company (i.e. sales rep vs. account manager). With inflation pushing costs up, the average car allowance will probably rise as well.

Calculate your 2023 car allowance - for free

Here are ways to boost your company car allowance to go beyond the typical car allowance without breaking the bank.

3 questions to help determine how much car allowance to pay

1: When was the last time you changed your car allowance amount?

If it’s been more than two years, you may be in trouble, due to inflation and cost volatility these past two years. If it’s been more than five years, you definitely are in trouble. In December 2022 dollars, a $600 allowance from December 2017 is worth only $494 due to inflation.

2: What generated the rate or amount of the car allowance?

If you don’t know the answer to this question, that’s a problem. If you do know the answer, and the amount wasn’t based on actual data about employees’ travel expenses, that’s also a problem. 

3: Is your car allowance a standard amount, or do you tailor it to specific employee needs and roles?

The way you answer this question could say a lot about your commitment to maintaining equitable policies and practices. We'll explain below.

Computer mouse on desk selecting step 1

If you haven’t already guessed it, behind these questions lie three criteria for a fair, effective car allowance policy:

3 qualities of a fair, effective car allowance policy

A car allowance should be:

  1. Flexible and reviewed regularly
  2. Based on accurate, relevant data
  3. Customized to individual needs

Ignoring those criteria? Your allowance is not competitive. 

Standard car allowance plans are based on a one-size-fits-all model. But in reality, different drivers experience different operating costs and territory sizes. Businesses today need the tools to craft flexible car allowance policies based on accurate, relevant data.

Your mobile employees operate on a system of trust. As they work to bring success to your organization, they trust you to ensure that their business needs are met. Car allowances instill that trust as your team members travel to meet clients and move between your locations. If they travel using their personal vehicle, a robust allowance lets them know their income will be protected from the volatile costs of owning and operating a vehicle.

A car allowance is also a big piece of the recruiting process. The amount and the way it is derived can separate you from your competition, steering top talent your way. Or it can have the opposite effect. If a company offers candidates a $600/month taxable car allowance, which may equate to somewhere between $400 and $360 after taxes, those candidates know that their allowance may not cover their expenses, especially if they live in a high cost territory or cover a broad territory. 

According to our annual survey, nine out of ten mobile workers weigh their costs against the car allowance before accepting a new position. If candidates hear an arbitrary number that does not take into consideration each employee’s territory size or territory costs, then they will likely rank your offer lower than your competitors’ offers.

Looking for car allowance benchmarking data specific to your industry? Get your free customized report here.

How to calculate a competitive car allowance

Forward thinking companies provide an up-to-date reimbursement calculated using actual costs. It is important that the process involve examining the relative costs of different territories – fuel, maintenance, taxes, etc. It is also important that the allowance amount account for territory size as well. Providing an allowance with a transparent basis instills confidence in new hires that they will be treated fairly and consistently.

The amount of the car allowance not only impacts recruiting new talent, but retaining your existing talent. When existing employees receive the same exact allowance but experience different expenses, they will figure out that the situation is not fair. Employees who get the short end of the stick may look elsewhere to find an employer with a more competitive reimbursement plan. 

Update your car allowance program today

According to recent mBurse surveys, most car allowances have not been revisited or changed in years. Gas prices fluctuate and inflation occurs, but the car allowance stays the same. Insurance costs climb, but the car allowance stays the same. Territories expand, but…you get the picture.

Going back to the three questions from the beginning: At some point you have to re-evaluate your car allowance, but this doesn’t necessarily mean spending more. It might be a function of removing the unnecessary tax waste from your existing policy. Our tax savings calculator can predict how much the company would save and the employees would benefit.

At mBurse, we specialize in crafting fair and flexible car allowances that can be paid as non-taxable reimbursement.

Fair allowance

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