Track mileage automatically
Get started
Keep Car Allowance Tax-Free - Employer's Guide
December 30, 2022 - 2 min read

How To Keep Car Allowance Tax-Free

When employers provide a car allowance, one of the most common concerns for both employers and workers is how to minimize their tax burden. Employees are often left wondering what part of their allowance is taxed and at what rate is a car allowance taxable. However, armed with the right knowledge, a car allowance can be kept tax-free altogether.

When do employers provide a car allowance?

Employers typically supply employees with a car allowance when they need to use a car as part of their work on a regular basis. Employees use this allowance to pay for fuel, maintenance, insurance, depreciation, and other expenses of using a personal car for work purposes. Although, in some cases, employees may use the allowance to rent or buy a car as well.


Mileage tracking made easy

Trusted by over 1 million drivers

When a car allowance is taxed

Employers can choose a number of different types of plans to provide their employees with a car allowance. The taxability of a car allowance depends on if it is an accountable or non-accountable car allowance plan.

Non-accountable plan

Many companies choose to use a non-accountable plan. If you choose this type of car allowance, you will pay a flat amount to your employees to help cover car expenses, which the employees can use as they please. With this type of plan, employees are not required to track their mileage or have expenses approved. Therefore, this type of car allowance is easy to use. But, if you use a non-accountable plan, the car allowance will be taxable as compensation, like wages. So, your employees are losing part of their car allowance to taxes.

Accountable plan

You could also choose to use an accountable plan for your employees’ car allowance, in which case, all substantiated parts of the car allowance will not be taxable. If you use an accountable plan for your employees’ car allowance, you will need to track your employees’ business mileage. Most companies track employee mileage by keeping a company mileage log. An app like Driversnote can be useful for this. This app can record your employees’ trips automatically and suggest the purpose of the trip. But, they can easily change the classification of the trip to ensure it is correct.

One way to ensure you have a non-taxable car allowance is to verify your employees’ mileage for a certain period of time and then reimburse them. This allowance will not be taxable as long as it is not above the 2023 IRS standard mileage rate for business travel, which is 65.5 cents.

Another option for providing your employees with a tax-free car allowance is to use a Fixed and Variable Allowance (FAVR). Although, your business does need to have five employees, each of whom drives over 5,000 miles a year, to use this allowance. You will also have to make sure you follow IRS regulations for the plan. A FAVR plan gives the employees periodic variable and fixed payments. The variable payment covers the operating expenses for the vehicle, such as fuel, oil, maintenance, and tires. At the same time, the fixed payment covers the fixed costs associated with a vehicle, including taxes, registration, license fees, insurance, and depreciation. The amount of these payments is based on location.

You could also provide your employees with a preset car allowance but track their mileage. Then, take the business mileage you have logged for an employee, and multiply this by the IRS standard mileage rate. Any portion of the employee car allowance that is less than or equal to this figure is not taxable. However, any portion above this figure is taxable.

For example, suppose you gave your employee a preset car allowance of $600 a month. Then, for the first month, their business mileage log shows that they drove 800 miles. You would multiply the 800 miles by the IRS standard business mileage rate of $.625. This would give you $500. This means $500 of the allowance would be non-taxable, and $100 of the allowance would be taxable.

How to provide a tax-free car allowance

You can provide your employees with a non-taxable car allowance by tracking your employees’ business mileage. To do this, your business needs to keep mileage logs that track all of the miles driven by employees for your business.

If your employees use their own car for work, they will need to track all of the miles they drive for business purposes and report this to your business. The easy way to track these miles is with a mileage tracking app that will automate the whole process and record all the required information.


Any portion of a car allowance that is in excess of the business miles driven multiplied by the IRS standard business mileage rate is taxable at the normal income rate for each employee.
A car allowance is taxable if it is not directly based on business miles driven. This type of car allowance is taxed the same as the employee’s wages.

How to automate your mileage logbook

Manually filling out your logbook can get tedious - see how to automatically track trips for your mileage reimbursement or deductions.
Latest posts
What we do
Driversnote makes mileage logging easy. Track, classify and report mileage with our app.
See how

Related posts

IRS Mileage Guide
IRS Mileage Guide

Here, you'll find a collection of articles that will help you to navigate the rules for everything from reimbursing employees for their..

January 31, 2023 - 5 min read
IRS Mileage Rate 2023
IRS Mileage Rate 2023

IRS mileage rate 2023 - everything you need to know. See the new business miles rate, if you can claim business mileage and how to use the 2023 mileage rate.

May 15, 2023 - 2 min read
In Which States is Mileage Reimbursement Mandatory?
In Which States is Mileage Reimbursement Mandatory?

Find out if your employer is obliged to pay out mileage reimbursement for your business-related miles according to state laws in 2023.

May 10, 2023 - 2 min read