If your job requires you to drive your personal vehicle for work, your employer likely offers an incentive in return for the wear and tear you're putting on your car. Most companies often provide this incentive in the form of a cent per mile reimbursement plan or a flat-rate car allowance.
As an employee, it's essential to know the pros and cons of each, especially if you're in the market for a new job and evaluating what benefits different companies offer. While businesses are not mandated by the federal government to have either program in place, companies know that it's important to compensate their employees for using their personal vehicles and to help attract new talent to their company.
Let’s go over the difference between mileage reimbursement and a car allowance, as well as the pros and cons of each.
How Does Mileage Reimbursement and a Car Allowance Differ?
A car allowance is a fixed-amount compensation that companies give their employees to cover the expenses of using their own vehicle over a period of time. A car allowance is meant to cover costs such as maintenance, insurance, fuel, depreciation, and more.
A cent per mile reimbursement is precisely what it sounds like – the employee is reimbursed a fixed rate per mile driven for business purposes. This method requires that employees track their mileage and submit accurate expense reports for their reimbursement to be issued. This reimbursement is intended to cover the same expenses that a car allowance covers.
The IRS sets a Standard Mileage Rate each year, which is determined by the national average of these expenses. Many businesses choose to reimburse their staff at that rate, which for 2020 is 57.5 cents per mile driven for business purposes. However, some companies choose to reimburse their employees higher or lower than the IRS Standard Rate, depending on if these costs tend to be more or less in the region where their business operates.
Now that you know the differences between an employee car allowance and mileage reimbursement, let’s look at the advantages and disadvantages of each.
Pros of a Car Allowance
The most significant benefit of a car allowance is that it's easier and less time consuming for both employees and companies. It's a simple, straightforward program to set up. Once it's determined what the car allowance amount will be, and how and when employees will be paid their car allowance, the system is set.
Another advantage of a car allowance is that, as an employee, you don’t need to track your mileage and submit expense reports on the miles you’ve driven for work.
Cons of a Car Allowance
Businesses can struggle to set a car allowance amount that is fair for all of their employees. If you are putting hundreds of miles on your car for work and other employees are using their vehicles significantly less, it can be an unfair benefit that may not be such a benefit to you after all.
As no two employees are going to drive the same distance each month, some employees will inevitably be underpaid while others will be overpaid. Your employer has to be careful not to set the allowance too high, because then they’d be paying employees for travel they never took. Also, if employees are spread out in different regions where car expenses vary, that also makes it unbalanced.
Car Allowance Tax Liability for Companies & Employees
The most considerable disadvantage of a car allowance is that the IRS treats it as a form of compensation, which is taxable. Since the IRS considers allowances as a form of compensation, this can lead to companies and their employees both having some tax liability. For the company this means that any amount you pay to your employees for the car allowance can be taxed, just like other normal wages.
As for the employees, the wages for car allowance they receive will be taxed at the same rate as other wages ( like paychecks, bonuses, etc.). As an employee, this means that after you file your taxes, your car allowance ends up being 30%-40% less than what you were given. Therefore, even if your car allowance amount before taxes was enough to cover your car expenses, the amount after taxes may be falling short. Here is a breakdown of how it works:
Company Car Allowance Tax Breakdown:
Employee Car Allowance Tax Breakdown:
Pros of Mileage Reimbursement
A cent per mile reimbursement is much more accurate and fair to all employees, rather than getting a flat-rate car allowance. With this program in place, you are reimbursed for exactly what you traveled, and there are no over- or under-payments for employees who travel more or less than others in the company.
The best part is that mileage reimbursement is not taxable like a car allowance. As long as you keep mileage logs to prove the distance you've driven for business, your reimbursement is not considered as income, and therefore not taxable by the IRS. And, the benefit to your employer is that they get to deduct this reimbursement on their taxes.
Mileage Tracking & Reimbursement Solution
The good news is that using a mileage tracking app, like Everlance, takes away all the hassles of tracking the miles driven. A simple swipe on your smartphone classifies your car trips as business or personal. Then you can easily download IRS compliant reports that you can submit to your employer for reimbursement. It doesn’t get any easier than that!
When using a mileage tracker like Everlance, there’s no doubt that a per cent mileage reimbursement plan is the better choice. Unlike a car allowance, it makes the most sense for employees and businesses alike.
Want help understanding how to maximize other potential business expense deductions? Check out Everlance's free Tax Academy resource. Or, consider talking with the tax team at Block Advisors. Everlance has partnered with Block Advisors, a team at H&R Block specially trained in self-employed and small business taxes, for a special combined offer. They can walk you through the mileage deduction and much more.
This blog represents generalized tax information and Everlance Support members are not certified tax professionals. If you need help with your specific tax situation, please reach out to your tax advisor.