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Employees’ Guide to Car Allowance
September 23, 2022 - 2 min read

Employees’ Guide to Car Allowance

Employees in many professions are expected to drive for their employers. But, many employers do not maintain a fleet of cars. Instead, these employers may provide a car allowance for employees. This allowance will reimburse you for the cost of purchasing a vehicle or using your own vehicle for business purposes.

A car allowance provides you with the freedom to choose the vehicles you drive while reimbursing you for expenses such as the purchase, wear and tear, fuel costs, and other expenses. However, it is important to know how a car allowance works in order to ensure your expenses are covered, and you achieve the best possible tax benefits.

How does a car allowance for employees work?

A vehicle allowance is generally a set amount that your employer pays in addition to your regular salary or wage each pay period. This is paid in order to offset vehicle-related expenses. In most cases, this will be a fixed sum which will be specified by your employer. A vehicle allowance for employees should be enough to cover vehicle-related expenses.

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Buying a car with car allowance

Your employer will generally pay a vehicle allowance directly into your ordinary paycheck. Once it is paid, it is yours to use as you choose, and this includes using it to help make payments on the purchase of a car. Once the money is yours, it can be used to buy or lease a car. Or, if you have a personal vehicle already, you can use it however you choose.

It is important to keep in mind that you will be the one purchasing the car. It will be your name on the contract. In some cases, you may be able to provide a dealer with proof of your vehicle allowance as evidence that you will be able to make payments on a car loan. However, this may vary.

Maintaining your current vehicle with a car allowance

A vehicle allowance is intended to cover all of the costs of using a personal vehicle for business purposes, including maintenance costs. A vehicle allowance will generally cover your costs for regular wear and tear as well as for regular maintenance items such as oil changes.

Receiving mileage reimbursement while getting a car allowance

Employees that receive a vehicle allowance are still eligible to be reimbursed for their business mileage at the standard rate. If your employer does not reimburse you for any additional mileage, you may be able to deduct it from your taxes, although under the current Tax Cuts and Jobs Act this is not possible for most employed individuals. See the current 2022 mileage rates from the IRS.

Taxing reimbursement and car allowance

Car allowance is taxable, just like your ordinary personal income. However, so long as business-related mileage is tracked and submitted to your employer, you can receive mileage reimbursement tax-free up to the product of your business mileage multiplied by the standard IRS mileage rate.

In addition, some states require employers to reimburse you for all business travel-related expenses regardless of a car allowance. In this case, it is crucial to track your business mileage carefully in order to present it to your employer for reimbursement.

FAQ

The IRS generally treats a vehicle allowance as taxable income. This is due to the fact that a car allowance is not attributable to mileage. Because of this, a vehicle allowance is considered compensation and, therefore, is taxed.
The average vehicle allowance is approximately $600. Although, this can be higher for executives.
A car allowance covers all of the costs of owning and operating a car based on the percentage that the car is used for business. This would include items such as gas, oil, and car maintenance, as well as insurance, depreciation, and registration, among others.

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