Car Allowance vs Company Car? Which One Is Better?
Samson Kiarie
Last update on:
September 18, 2024 9:21 AM
Published on:
If you require employees to travel for work, you need to cover their travel expenses. To that end, the two popular options are a car allowance program and a company car. Each option has pros and cons, which we’ll cover in our comprehensive car allowance vs. company car guide to help you make an informed decision.
We’ll walk you through how each option works, the costs involved (including all hidden fees), and tax implications. In addition, we’ll tell how a reliable mileage tracking app can help you improve travel expense reimbursement, regardless of the option you pick.
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A company car program refers to a case where you (the employer) buy company vehicles and assign them to your employees. In this case, the employee uses the car for business purposes, and the company covers all the costs.
In other words, the company foots all employee travel bills, including fuel, parking, and vehicle maintenance (including tire wear and tear). The costs may also include insurance and depreciation costs. You could opt for a cash allowance or blend that with a fuel card for each employee.
The company vehicle program has its benefits and drawbacks:
Advantages of Company Car
Here are some of the benefits of the company car program:
A Cool Employee Perk
Employees love having different perks, and there’s a reason why employers invest so much in all kinds of freebies and benefits.
To attract and retain talent, you must ensure your employees are well-equipped and ready for success. Running a mobile team means providing them with cars to reach different work sites quickly and safely. The best part is that employees don’t have to worry about regular maintenance, repairs, and insurance.
An Excellent Branding Tools
A shiny, new car with your company logo and brand messaging can positively impact your company’s image and brand visibility. In other words, a branded company car is a moving advertisement.
New potential clients will know your company exists as employees traverse different states and regions in the branded vehicles. Shun shabby cars because they paint your business as unreliable and can be a detriment to your brand image and employee productivity.
Gives You Total Control
Control over expenses is essential in the company car or car allowance dilemma.
First, when offering a company car, you get to choose a model and can do so after making a detailed assessment of the tax-efficient company cars. You can then pick a model with great gas mileage efficiency to reduce car expenses significantly.
You can even pick cars with lower CO2 emissions to qualify for certain tax reliefs. There are federal tax credits for new electric cars and plug-in hybrid vehicles of up to $7,500, while in some cases, state and/or local incentives may also apply.
Second, maintenance and insurance are your responsibility when offering a company car instead of a car allowance. Although this doesn’t look like a plus at first sight, it is. As an employer, you can opt for a generous insurance policy and regular maintenance, thus ensuring the safety of your employees when they’re on the road.
Saves Employees Upfront Investment
Not all your field employees have or can afford a car. Hiring a door-to-door sales rep, a construction worker, or a home-care nurse and making a personal car requisite for the job will lock out some of the top talents.
Moreover, those who can afford a new vehicle and are yet to invest would be forced to splash the cash on an investment they hadn’t planned for. Again, some employees could choose their financial freedom over such a job.
A company car is a massive perk for such employees since they don’t have to spend a single cent on the acquisition, insurance, or maintenance.
Disadvantages of Company Car
While offering a company vehicle has many advantages, it carries notable drawbacks, including:
Can be Expensive
Purchasing company cars requires a considerable investment: not just the initial buy, but you have to consider other factors such as insurance, maintenance, and vehicle depreciation.
Leasing company cars can be a good alternative, as it reduces the upfront costs. However, if the employee leaves or their role is redundant or no longer requires using a car, you’ll be stuck with monthly payments for the rest of the contract.
Requires a Lot of Administrative Work
A lot of administrative work goes into managing the company fleet. You have to constantly monitor each vehicle to ensure its maintenance and insurance are up to date. That can be much admin work, especially with a large fleet.
Besides showing a driver’s total mileage, Timeero displays their route during the journey.
Remember that, unlike other employee benefits, the company car isn’t taxable; we’ll cover the company car’s tax implication in a section below. However, you still need to provide detailed reports demonstrating the vehicle has been under business use. That can be time-consuming, primarily if you use paper logs to track mileage.
You can use an apt mileage tracking app such as Timeero to track mileage automatically and sidestep the tedious manual work. Timeero generates IRS-compliant records that show required information, such as the purpose of the trip, date, location, and mileage. In addition, it helps distinguish between personal and business mileage for accurate taxation.
Company Car Tax Implications
There are two tax implications you should know about the company car model:
Business Use is Tax-Deductible, Personal Use Is Not
IRS considers a company car a working condition benefit and is therefore not taxable, unlike other employee benefits. However, this IRS condition covers the business use of the vehicle. If an employee uses the company car to run personal errands or commute, the personal use is taxable.
For this reason, if you pick the company car option over car allowance, you should invest in a reliable mileage tracking app such as Timeero.
Timeero is easy to use for all employees and keeps accurate mileage logs for each employee. The app tracks mileage automatically: employee only needs to clock in and start driving, and Timeero will track their mileage when they exceed the predefined speed.
Besides that, commuting expenses aren’t tax deductible no matter how far from work someone lives. This is because the IRS believes your home location is your choice and not a necessity.
As a result, you should deduct commuter mileage from the employee's total mileage.
Thankfully, Timeero deducts employee mileage automatically. You only need to preconfigure the distance from an employee's home to the office, and Timeero will only record miles when the employee exceeds the preset threshold. Learn more in our full Timeero review.
Timeero tracks employees' mileage in real-time, deducting commuter mileage to comply with IRS regulations.
Fuel, Insurance, and Car Maintenance Expenses Are Tax-Deductible
Moreover, the expenses of keeping the car in good condition are tax deductible. This includes the use of company cars for personal use.
The IRS permits you to deduct 100% of the car maintenance cost, regardless of whether you use it for personal use. However, only business owners and self-employed employees are eligible for the tax deduction related to car expenses.
And if you took a loan to finance or lease the company fleet, the IRS considers the interest expense on that loan as a tax-deductible business expense.
Car Allowance: How It Works, Pros & Cons
If you don’t have the financial muscle or a credit score to get a loan to finance the company car program, a car allowance program would be a great alternative. In this case, employees will use personal cars for business purposes, and you’ll reimburse them at a flat rate for the business use of their own vehicle.
The standard car allowance provides employees with a fixed monthly stipend to cover gas, oil changes, parking fees, tire wear and tear, and other expenses incurred while using their car for work. Recent statistics show that the stipend for the average field employee is $575, whereas executives may receive upward of $ 1,000 per month.
Advantages of Standard Car Allowance
Here are some of the benefits of the standard car allowance:
It Is Simple
The biggest perk is simplicity. The car allowance remains the same monthly; recent data proves that. For example, the monthly stipend for the average mobile worker in 2020, 2021, 2022, and 2023 was $575, exemplifying that you might not need to adjust the allowance for months.
This makes the monthly stipend easy to implement, manage, and account for. You can even use a standing order to pay each employee on a specific date each month without a hassle. This translates to less admin work, and you don’t even need to hire additional staff to take care of the insurance, regular checks, and mileage.
Beneficial to Employees
A car allowance leaves employees at the discretion to choose the car they want to drive. They can either purchase or lease the vehicle of their choice. Moreover, low-mileage field employees will have a sizeable leftover sum, which can boost morale.
Disadvantages of Standard Car Allowance
Ken Robinson, director of product marketing at Motus, opines, “While the standard car allowance program is simple to manage, it features some hidden cost that employers tend to miss.” We’ll shed light on every cost and other disadvantage of this program:
It’s Inaccurate
The car allowance program is founded on assumptions. First, the program assumes all employee trips are identical, but reality proves otherwise.
No two employee business trips are the same. Their mileage varies based on various factors such as routes, client load, regions, and many other dependencies. Beyond that, employees driving the same distance can incur different costs if they are in different states or regions.
Second, the car allowance program assumes the cost of maintaining a personal vehicle is the same everywhere in the United States. On the contrary, the prices that add to travel expenses, such as insurance and fuel costs, vary from state to state.
The truth is each employee's travel expenses are different. Consequently, reimbursing employees the same amount means under-reimbursing high-mileage workers and over-reimbursing low-mileage employees. That can impact employee morale and productivity; more on that.
Tax Waste
A standard car allowance is treated as any income by the IRS, which means it’s subject to state and federal taxes. Many field employees are in the 24% income tax rate bracket. Besides that, employees must pay FICA and Medicare tax, which is 7.65%.
If you pay mobile employees an average of $575, their take-home will shrink 31.65%. That means only $393 will get into the employee’s account each month after tax deduction: $182 goes to the IRS.
Not just that. As employees take home shrinks, the amount you pay as an employer inflates. Remember that the employer must also pay FICA and Medicare taxes for each employee. That means for every $575, you pay an extra $44.
This figure might add up to thousands of dollars, depending on the size of your workforce. A study found that a whopping full year of car allowance goes to tax waste every two and a half years.
Inflexibility
Another car allowance downside is its inflexibility. As mentioned earlier, the average monthly stipend for mobile employees in the last four years hasn’t changed.
However, during those years, businesses have experienced economic upheavals, leading to gas price spikes. The overall cost of maintaining the car has also skyrocketed as the allowance stagnated.
As the costs keep rising, there will come a time when the allowance for the under-reimbursed employees will not be enough to cover the business mileage expense.
Under-reimbursement of employees leaves your business at legal and financial risk. Some states, such as California, Massachusetts, Illinois, and the Dakotas, have laws governing employee reimbursement for business expenses. If employee reimbursement isn’t aligned with business expenses, your company could be in for class-action lawsuits.
Dents Employee Morale
Since a standard car allowance is a fixed sum, not all employees will benefit equally. Namely, those who drive fewer miles will be in a much more favorable position than high-mileage employees.
The latter will be able to cover all their work-related costs, plus they will even be able to keep some money for themselves. On the other hand, the former will be under-compensated, and this car allowance gap can lead to dissatisfaction and impact employee morale.
Reduces Employee Productivity
Undercompensated employees, in an attempt to reduce their expenses, will get cheaper car insurance, skip regular car maintenance, or use older vehicles. This can cause frequent car breakdowns, causing employees to miss or arrive late for client meetings.
Even more importantly, companies are liable for car accidents caused by their employees while on work-related tasks. As you can imagine, this can increase your costs since you’ll be required to pay for damages and legal expenses.
Standard Car Allowance Alternatives
The rigidity of standard car allowance leaves room for numerous flaws that ultimately affect the day-to-day operations of your business. To sidestep shortcomings such as tax waste, companies adopt more flexible variations, including:
Accountable Allowance
Also known as a car allowance with a mileage substantiation, this method differs from a standard allowance because employees have to track business miles.
As a result, employees avoid taxation, provided the allowance isn’t greater than the mileage traveled multiplied by the IRS standard mileage rate for that year. Remember that anything above the IRS mileage rate will be taxed at the appropriate tax rate.
Using an accurate mileage tracking app such as Timeero will help you hold employees accountable and make it possible for them to get a tax write-off on their car allowance.
While the accountable allowance ensures employees get the full monthly stipend, it might not cover employee’s business expenses, mainly when gas prices skyrocket.
Mileage Reimbursement
In this program, you reimburse mobile employees on a cents-per-mile rate. Like the accountable allowance, employee allowance won’t be taxed provided the cents-per-mile rate is at or below the current IRS mileage rate. Learn more in our car allowance vs. mileage reimbursement guide.
Again, employees have to keep accurate, IRS-compliant mileage logs. You could face a potential IRS audit if the mileage logs are inaccurate or don’t meet IRS compliance. This accentuates the need for a reliable mileage-tracking app such as Timeero.
With Timeero, you can filter reports by date range to see total mileage during the week, month, or a specified period.
With Timeero, employees only need to clock in and drive. When they exceed the predefined speed threshold, Timeero will start to log their mileage. The good thing is that Timeero’s commuter mileage tool deducts employees' commutes from business travel to meet IRS compliance.
Fixed And Variable Rate (FAVR)
The fixed and variable (FAVR) car allowance is more than a cents-per-mile program in that it considers fixed and variable costs. Rather than reimburse employees based purely on the miles driven, FAVR customizes each employee’s allowance based on fixed costs such as depreciation, taxes, insurance, and other fees.
It also takes into account variable costs such as fuel costs, maintenance, and tire wear and tear.
This way, every employee is fairly reimbursed, as both mileage driven and the costs in different regions are taken into account.
Since FAVR is non-taxable, it solves the tax waste problem associated with the standard car allowance program. It also ensures fair reimbursement of each employee, effectively nullifying issues such as dwindling morale and productivity.
The only drawback is that FAVR is more complex and requires the help of a seasoned accountant to implement it.
So, Which Option is Better for Your Business - Company Car vs. Car Allowance?
From everything we discussed so far, it all depends on your particular situation. You should come up with different calculations based on the mileage you expect a particular employee to drive, taxes, write-offs, deprecation, insurance, and all the key factors, and see which option is more cost-effective for you.
How Can Timeero Help You Gain Control Over Your Mileage and Cut Down Your Mileage Costs?
Segmented Tracking: All the info you need - at a glance
Remember that regardless of your chosen reimbursement program, you’ll need a reliable mileage tracker. Here is a summary of why Timeero is the best mileage-tracking app for sales and other field employees.
Streamlining the process allows you to ditch manual paper mileage logs and reduce errors.
The app automatically tracks and records all business-related mileage.
You can create accurate and reliable mileage reports with a few clicks.
See the current location and movements of your field employees in real time.
Using the Route replay feature with breadcrumbing technology, you can see your employee’s path to a particular destination. You will know if they are choosing scenic routes rather than the shortest ones or running personal errands.
The Segmented Tracking feature will give you a visual timeline of how your employee’s day was spent. Business travels, stops, and jobs - all this at the single dashboard. If there are any red flags in an employee's behavior, they will be easily identified.
The app can suggest the shortest route to a specific destination. Using the suggested mileage feature, you can also compare the actual way with the recommended one.
Use Timeero’s integrations with QuickBooks, ADP, or other popular payroll software to effortlessly reimburse mileage costs.
Is It Better To Have a Company Vehicle or a Vehicle Allowance?
It’s not a straightforward answer. Each option, company car or car allowance, has pros and cons and the underlying tax implications. You must analyze these factors to decide which model works best for your company.
What Are the Pros and Cons of Having a Company Car?
While a company car is a cool perk for employees and moving advertisements for your company, it can be expensive and require a lot of admin work to manage.
Get real-time insight into work-related routes, mileage, and expenses
Samson is a mathematician turned content marketer specializing in SaaS and Tech content. He focuses on the practical aspects of software systems while keeping abreast of the industry’s cutting-edge principles to create informative and engaging content. When he’s not writing, Samson spends time playing or watching soccer.
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