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Car Allowance vs Company Car? Which One Is Better?

Natasa Djalovic
Last update on:
June 30, 2022 12:42 PM
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Businesses that require their employees to travel for work need to figure out how they will cover travel expenses. 


We’ve already discussed whether and why you should cover the cost of your employees’ work-related trips and how car allowance stacks up against mileage reimbursement. 


In this article, we’ll compare a car allowance vs a company car and help you decide which of the two options is better and more cost-effective for your business.  


A Car Allowance vs a Company Car - The Difference Between the Two 


In order to understand the comparison between a car allowance vs a company car, it is important to understand how each option works.


What Is a Car Allowance and What Does It Cover?

A car allowance refers to a fixed sum of money an employee receives monthly or annually atop of their salary for work-related use of a personal vehicle


It is supposed to cover different expenses, including gas, wear and tear, depreciation, tires, and any other incurred while an employee is using their car for work. Your employees can choose whether they will use that money to buy or lease a new vehicle or offset the car costs. 


What Kinds of Car Allowance Programs Are There?  

The car allowance vs a company car discussion has to start by analyzing different car allowance models.


You have a choice when it comes to car allowance programs. 


It’s a good thing that some of them allow for a tax deduction so that you can find the one that works for your business and employees. 


A standard car allowance 

Giving a flat company car allowance every month is the most common method. Employers prefer it because it’s hassle-free and doesn’t require tracking mileage or accounting


Although it’s the least time-consuming of all the options, a standard car allowance is not necessarily the best way to reimburse your employees for the business use of their vehicle. 


A mileage allowance 

Also known as a car allowance with a mileage substantiation, this method differs from a standard allowance because employees who use personal cars for work purposes have to track business miles. 


In this case, employees could avoid taxation, presenting the evidence that the allowance they get isn’t greater than the mileage traveled multiplied by the IRS standard mileage rate for that year. If they get more money than that, the surplus is taxable. 


Using an accurate mileage tracking app will both help you hold your employees accountable and make it possible for them to get a tax write-off on their car allowance. 


A car allowance with a fuel card 

Since a car allowance isn’t always enough to cover gas and other car expenses, some employers combine this reimbursement method with a fuel card. 


Again, to avoid taxation, it’s necessary for employees to demonstrate that they used the fuel card only for business purposes. This is where Timeero can come in handy as it can precisely track employee mileage but also their location using GPS


A fixed and variable rate (FAVR) car allowance 

This car allowance program is non-taxable, but it’s more complex and requires the help of an accountant


It consists of a fixed allowance adjusted for every employee’s zip code and a variable payment. 


This way, every employee will be fairly reimbursed, as both mileage driven and the costs in different regions are taken into account. FAVR is non-taxable. 


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Advantages of a Car Allowance 

Discussing the advantages of this method will help you determine which of the two options is better for your organization - a company car or a cash allowance. 


It’s simple and flexible 

A car allowance offers a high degree of flexibility to both employers and employees. 


Employers don’t have to purchase a car that will lose a huge portion of its value over time. Such an asset can turn into a burden when no longer needed or used frequently. 


Besides that, you are not responsible for maintenance, repairs, and insurance. However, this isn’t always a benefit, but more on that later on. 


Employees, on the other hand, can opt for the vehicle of their choice and decide whether to purchase or lease it. 


A standard car allowance means less admin work 


And employees don’t have to track their mileage or prove they spent the allowance on business-related expenses. 


The bottom line is that there’s usually not much admin work. Subsequently, you don’t have to pay additional admin staff to take care of the insurance, regular checks, and mileage. 


It’s a win-win situation and an obvious answer to our car allowance vs company car riddle, right? Not always. 

Disadvantages of a Car Allowance

Although it seems like a straightforward solution, a car allowance has a couple of downsides. 

It’s taxable 

A standard car allowance is treated as any income by the IRS, which means it’s subjected to state and federal taxes. 


In addition to that, both you and your employee have to pay FICA and Medicare taxes. As you can guess, after all these deductions, the allowance will shrink, and the take-home amount will be between 30% and 40% lower than the before-tax amount


That’s why you should make sure your employees can cover their car expenses with a post-tax allowance. By failing to do so, you risk violating labor laws and regulations in the states that require that employers fully reimburse employees for business expenses. Some of them are California, Massachusetts, Illinois, and the Dakotas.  


When we’re talking about full reimbursement, there’s another expense that can significantly reduce the take-home amount - depreciation. According to some calculations, an average car loses 60% of its value in 5 years. Insurance is another element that eats into the car allowance to a significant extent. 


As you can see, it quickly adds up, which is why you have to be very careful when it comes to calculating the car allowance you pay to your employees


It can affect employee morale 

Since a standard car allowance is a fixed sum, not all employees will equally benefit from it. 


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 be even 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. 


Similarly, some employees live in areas with higher insurance and gas costs, which means they will likely be under reimbursed.


Evidently, if your situation is similar to the ones described above, this model evidently isn’t the best way to solve the car allowance vs a company car puzzle. 

It can reduce employee productivity 

Undercompensated employees, in an attempt to somehow reduce their expenses, will be tempted to get cheaper car insurance, skip on regular car maintenance, or use older vehicles. 


All this can affect their performance at work due to their car breaking down more frequently. And 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 requested to pay for damages and legal expenses. 

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What Are the Advantages of a Company Car? 

In the second part of the car allowance vs a company car comparison, we’ll discuss the pros and cons of offering a company car to your employees for business purposes. 


It’s a very 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, it’s important to make sure your employees are well equipped and set up for success. Running a mobile team means providing them with cars so that they can reach different sites of work quickly and safely. 


In addition to that, they don’t have to worry about regular maintenance, repairs, and insurance. 


It’s an excellent branding tool 


A shiny, new car with your company logo on can have an extremely positive impact on your company’s image and branding efforts. 


Imagine a situation in which your employee visits a client in an old, shabby car. 


What kind of impression do you think this would leave? 


Your company and you as an employer would most probably come across as not too reliable and serious. So, consider a company car as a moving advertisement that also increases your brand visibility by driving around. 


It gives you total control 


Having control over your expenses is an important factor in the car allowance vs a company car dilemma. 


First of all, when offering a company car, you get to choose a model and can do so after making a detailed assessment about the tax-efficient company cars. This way, you can also pick a model with great gas mileage and significantly reduce your overall car costs. 


For example, cars with lower emissions qualify for certain tax reliefs. There are federal tax credits for new electric and plug-in hybrid vehicles of up to $7,500, while in some cases, state and/or local incentives may also apply. 


When you opt to offer a company car instead of a car allowance, maintenance and insurance are your responsibility. Although this doesn’t seem like a plus, at first sight, it actually is. As an employer you can opt for a generous insurance policy and regular maintenance, thus ensuring the safety of your employers when they’re on the road. 


If we bear in mind that your employees, regardless of whether they drive their own or a company car, are involved in a traffic accident, you’ll be held accountable. This point clarifies why it’s much better for businesses to be responsible for car insurance and maintenance. 


It saves employees from having to invest in the car upfront 

Some people don’t have a car or can’t use it for business purposes. 


That means hiring a door-to-door sales rep, a construction worker, or a home-care nurse would imply that these professionals would have to invest in a car even if they haven’t planned such an expense. 


Offering them a company vehicle can be a huge selling point and obviously scores a lot of brownie points in the car allowance vs a company car comparison. 


Still, you should be aware of the two important considerations: 


* Regardless of who drives the company car, only its business use is tax-deductible. Therefore, a mileage and GPS-tracking app that will distinguish between the personal and business use of a vehicle is a must. It will allow you to keep accurate driving records and use them for tax write-offs. Apps like Timeero help you generate IRS-compliant records that show required information such as the purpose of the trip, date, location, and mileage. 

* Commuting expenses aren’t tax deductible no matter how far from work someone lives, and you should inform your employees about this. Even if you as a business owner use a company car to travel to and from home to work. The reason for this is that the IRS believes that the location where you live is your own choice and not a necessity. 


Disadvantages of a Company Car

While offering a company vehicle boasts a long list of advantages, it’s only fair to mention its disadvantages and then see where we stand in the car allowance vs a company car comparison. 


It can be an expensive perk 

Purchasing a car is a big investment. Don’t forget to factor in depreciation.


Leasing can reduce your upfront costs, but if your employee leaves or their role no longer requires using a car, you’ll be stuck with monthly payments for the rest of the contract. 


A lot of administrative work 

We’ve already mentioned that in order to be eligible for tax deductions, you need to provide detailed reports demonstrating when the vehicle has been used for business purposes. Luckily, Timeero can help you with this as you can have all the records in one place and hand them over to the IRS in case of an audit. 


But apart from that, everything else regarding maintenance and insurance falls on your hands, and that can be a lot of admin work. 


So, Which Option is Better for Your Business - a Car Allowance vs a Company Car?

From everything we discussed so far, it can be concluded that it all depends on your particular situation. What you should do is come up with different calculations based on the mileage you expect a particular employee to drive, taxes, write-offs, deprecation, insurance, and all the major factors, and see which option is more cost-effective for you.


AUTHOR
Natasa Djalovic

Natasa is a writer specializing in the IT and software industry with 6+ years of experience in content writing and online marketing. During that period, she wrote more than 1,000 articles and several ebooks. She majored in English language and literature and loves cats, sneakers, and candy. When she's not working, she's probably binge-watching Netflix.

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