A Complete Guide on Company Car Allowances

A Complete Guide on Company Car Allowances

You may decide to offer an auto allowance benefit if you have employees who need to travel by car for work, such as salespeople who spend a lot of time on the road to see potential clients and regional managers who constantly move between branches.

And, even though helping employees cover work-related car costs isn’t federally mandated, it can help boost employee satisfaction and make your company remain competitive. 

We’re giving you the full scoop on car allowances and alternative vehicle benefit options so you can decide if offering them to employees is the right move for your company. You’ll also learn the taxation rules associated with car benefits and discover methods for simplifying the administrative processes behind them. 

What is a car allowance?

A car allowance is a set amount of money companies pay employees to compensate them for using their personal vehicles for work purposes, on a regular basis. Companies provide car allowances in place of access to company cars.

This allowance is meant to cover costs such as gas, insurance, vehicle maintenance, wear and tear, and depreciation. For example, companies may choose to offer a flat rate of $500 per month to mobile employees to cover these expenses.

Auto allowances are not to be confused with commuting benefits. While companies can offer commuting benefits to their employees, these benefits aren’t tax-deductible.

How to set a car allowance amount

Unfortunately, there’s no one-size-fits-all formula for setting a car allowance. And, unlike the IRS’s standard mileage reimbursement rate, there is no standard for or limit on how much companies can offer their employees as a car allowance. For this reason, and because the business use of a personal vehicle is difficult to prove, car allowances are subject to taxation.

In an ideal world, you’d be able to pay each employee for the exact costs associated with using their personal vehicles for work. However, this calculation can be impossible to figure out and creates a lot of admin work.

Instead, you can use these tools and tricks to set your own car allowance rate.


There are three factors you should consider while calculating the gas-related component of your car allowance: gas prices, fuel efficiency, and mileage. 

Refer to AAA’s Gas Prices tool to find the average cost of fuel nationally and in your state. Monitor these costs before selecting a rate to use to calculate gas costs. 

Employees will be driving vehicles with various fuel efficiencies. Look to the Bureau of Transportation Statistics’s (BTS) data on average fuel efficiency to find a happy medium. Based on data from 2009 and 2019, the average fuel efficiency of a light vehicle (basically anything that isn’t a truck) is 21.84 miles per gallon. 

Refer to expense reports or ask mobile employees to track their mileage for a period of time, and use those records to calculate the average distance employees travel via car. 

Let’s say your company serves the Northeast United States, and by monitoring gas prices you discover that the average cost of gas in the region is $3.12. Based on BTS data, you know that average fuel efficiency is 21.84 miles per gallon. And based on historic expense reports, you know that your mobile employees drive 500 miles each month, on average. 

Divide miles driven by fuel efficiency (500/21.84=22.89) to find out how many gallons of gas are used up. Then multiply that figure by the average cost of gas per gallon (22.89*$3.12), which results in $71.42.


Data on average car insurance costs – both nationally and by state – is easy to find. 

Continuing our example, the average monthly cost for car insurance in the Northeast is $136.

Vehicle maintenance

According to research from AAA, the average monthly cost of vehicle maintenance and wear and tear is $79. 


According to the same AAA research, car value depreciates $313 each month, on average.

By adding up all of the expenses from our example and average costs ($599.42), it would make sense for a company with mobile employees that serve the Northeast U.S. to offer a $600 monthly car allowance.

What is the average car allowance? 

The average car allowance companies provide employees who use their personal vehicles for work is $575 per month, which comes out to $6,900 annually.

With the average cost of a new car as high as $38,000+, it pays off to offer a car allowance instead of a company car.

Is a car allowance taxable income? 

Yes. A car allowance is considered compensation and is taxable at both the state and federal levels because the business use is difficult to substantiate.

Because a car allowance is taxable income, they’re taxed at the same rate as wages and are subject to FICA taxes. This means the net auto allowance ends up being 30%-40% less than was initially given to the employee. So an annual car allowance of $5,000 would translate to $3,000-$3,500 after taxes.

The difference between a car allowance, mileage reimbursement, and company cars

There are three main ways to compensate employees who need to drive for work-related purposes for car costs: by providing a car allowance, mileage reimbursement, or a company car. 

Car allowance 

For a car allowance, the company reimburses employees for using a personal vehicle for work with a fixed stipend. Some companies provide a standard stipend for all use cases, while others choose to have different stipend levels depending on position or seniority.

Mileage reimbursement 

With a mileage reimbursement system, work-related personal vehicle compensation depends on how much the employee drives. 

Employees are responsible for tracking how many miles they’ve driven, and requesting a reimbursement by filing an expense report. While tracking miles driven can be a hassle for employees, apps are making it easier than ever.

Employees are paid using a standard cents-per-mile rate. Most companies adhere to the IRS’s standard mileage rate because it’s the maximum that the IRS will allow companies to write off as a business expense.

The standard mileage rate changes every year. The IRS’s standard mileage rate for businesses in 2021 is $.56 per mile. 

If, for example, a regional manager drove 591 miles in one month to oversee their branches, they could be reimbursed up to $330.96, which is also how much the company could deduct from their revenue in business expenses.

Company cars

Businesses can also choose to buy and own vehicles that are reserved solely for business purposes. In this scenario, the company would cover all of the costs associated with the vehicle – insurance, gas, repairs, and payments.

The company could share vehicles between employees, or assign one employee to each vehicle.

While providing employees with a company car is the most expensive option, it has branding benefits for sales reps on the road. A prominent logo, tagline, and contact information serve as a mobile billboard that can attract new customers.

Fixed and Variable Rate (FAVR) reimbursement

There’s another way for companies to compensate staff for personal car use that combines a fixed car allowance with a reimbursement. The IRS approves of the Fixed and Variable Rate (FAVR) reimbursement method and doesn’t consider it taxable income. 

The IRS separates vehicle reimbursement into two categories:

Fixed expenses: Costs that stay consistent month to month, like licensing, insurance, and depreciation. Fixed expenses are calculated with IRS-supported methods, such as where the vehicle is located with zip code data, so this stipend remains tax-free.

Variable expenses: Variable expenses entail other expenses contributing to the cost of using the vehicle, including gas, maintenance, and actual miles driven while on the job. Costs are also determined based on local cost data rather than a uniform rate. 

How Lola.com makes managing car benefits easier

To avoid tax implications, FAVR reimbursement is the way to go, but it requires more administrative effort and expense reports for reimbursement of the variable expenses.

Lola.com makes reimbursing staff easy by letting you issue virtual corporate cards to all employees who need to use their personal vehicles for work, and limiting the card so that it can only be used for gas and car-related expenses. 

Lola.com captures all transaction data in real-time and measures it against your budget, so you always know exactly how much your team is spending on gas and related car expenses.

The bottom line: Covering work-related car costs makes your company more competitive

Although companies aren’t legally obligated to cover work-related use of personal vehicles, doing so helps you stay competitive. Whether you offer mobile employees a car allowance, mileage reimbursement, access to a company car, or FAVR reimbursement, doing so can help you retain the best talent in your industry. 

About the Author: Ana Cvetkovic
Ana Cvetkovic is a freelance writer for Lola.com. She is also the CEO of BLOOM Digital Marketing, a creative marketing agency that specializes in creating demand generation content for SaaS companies in the hospitality and travel industries.