Car Allowance
Quick definition
A flat monthly payment from an employer for vehicle use. Generally fully taxable.
A car allowance is a flat monthly payment an employer pays a worker for using a personal vehicle for business. Unlike per-mile reimbursement or FAVR, a flat car allowance is generally treated as taxable wages.
Tax treatment
A car allowance shows up on your W-2 as wages and is subject to federal income tax, FICA, and state income tax. Workers cannot deduct unreimbursed mileage to offset it (W-2 deduction is gone). The employer gets a wage deduction.
Why employers still offer it
Simplicity. No mileage logs to review, no per-mile math. The downside is that workers absorb the tax inefficiency. A $500/month allowance after taxes is closer to $350-$400 in real value, less than a full IRS-rate reimbursement would be for moderate drivers.
When per-mile beats car allowance
For drivers logging more than about 800 miles per month, per-mile reimbursement at the IRS rate produces more tax-free money than a typical $500 allowance does after tax. Workers in this situation should ask for IRS-rate reimbursement instead.
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