Car Allowance vs Mileage Reimbursement vs FAVR

Three structures dominate how employers pay for employee personal-vehicle use: flat car allowance, per-mile reimbursement, and FAVR. Each has different tax implications and different fairness profiles for high-mileage vs low-mileage drivers.

Flat car allowance

A fixed monthly amount, usually $400-$700, paid regardless of miles driven. Fully taxable as W-2 wages. The employee pays federal, state, FICA, and Medicare on the full amount. After tax, a $500/month allowance is closer to $350-$400 in real value. Over-pays low-mileage drivers and under-pays high-mileage drivers.

Per-mile reimbursement (IRS standard rate)

Employee submits a mileage log each pay period. Employer pays the IRS standard rate (72.5¢/mile in 2026) per business mile. Tax-free if paid through an "accountable plan" with mileage logs and business-purpose documentation. Excess reimbursement above IRS rate is taxable. Scales with miles, so low-mileage and high-mileage drivers are treated proportionally.

FAVR

FAVR (Fixed and Variable Rate) is a hybrid: fixed monthly stipend (covering depreciation, insurance, registration) plus a variable per-mile rate (covering gas, oil, maintenance). Typical: $400-$700/month fixed plus 14-22¢/mile variable. Tax-free if the plan meets IRS substantiation rules (Section 1.62-2). Most equitable across regions and mileage profiles.

Side-by-side example

Driver A logs 800 business miles/month. Driver B logs 2,500 business miles/month. Same employer.

• Flat allowance ($500/month): Driver A receives $500 (over-paid). Driver B receives $500 (under-paid). After tax, both keep ~$350.
• IRS-rate reimbursement (72.5¢/mile): Driver A receives $580 tax-free. Driver B receives $1,813 tax-free. Each is paid in proportion.
• FAVR ($500 fixed + 18¢/mile): Driver A receives $644 tax-free. Driver B receives $950 tax-free. Better than flat for both.

Which one to ask for

If you are a high-mileage driver, IRS-rate reimbursement almost always pays best. If you are a low-mileage driver, FAVR or flat allowance both work. Flat is taxed and FAVR is not, so FAVR is the better deal if your employer offers it.

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