If you use your personal car for your own business, you can take a mileage deduction to save on your taxes. But what if you drive your own car for your W2 job? Your employer can reimburse you and that often comes through a car allowance or a mileage reimbursement.
Let’s go over the differences between a car allowance and a mileage reimbursement.
How does a car allowance work?
A car allowance is what an employer gives employees for the business use of their personal vehicle. A car allowance is a set amount over a given time. It’s meant to cover the costs of using your own car. A car allowance covers things like fuel, wear-and-tear, tires and more.
Example: Noah works for Traveling Nurses Industries. He uses his personal car for visits to clients. Traveling Nurses Industries gives him $200 a month for these expenses. The amount doesn’t change each month, no matter how far clients are.
What is an employee vehicle allowance?
This is another way of describing a car allowance. It’s often the exact same thing with the same positives and negative aspects.
What is a mileage reimbursement?
A mileage reimbursement is when a company pays you back for your car costs after you’ve filed an expense report. The company reimburses you for those expenses. A mileage reimbursement varies based on how much you drove. That’s the major difference between it and a car allowance.
Most companies offer a mileage reimbursement at a cents-per-mile rate. Many businesses peg this to the standard mileage rate. This is not required. A mileage reimbursement often requires employees to maintain a mileage log. They will often include that with their expense reports.
Example: Michelle works for Superior Construction Company as a site foreman. She drives her personal car to many construction locations per month. She tracks her business miles every month and includes it with her monthly expense report. Michelle is reimbursed based on how many miles she drove the previous month.
Are car allowances taxable income?
There is no federal mandate for private companies requiring a mileage reimbursement or a car allowance. Companies do this to attract and keep employees. Think about it: if you have the choice between equal companies and one offers compensation for your car usage, which one would you choose?
A car allowance or mileage reimbursement can be taxable income for the employee depending on how the employer keeps track of it. With an accountable plan, companies don’t have to report these as pay. With a non-accountable plan, reimbursements are reported as taxable pay.
What’s an accountable plan? It’s a plan where the reimbursement or allowance follows these requirements:
- Has a business connection
- Requires substantiation
- It returns excess amounts in a reasonable time.
Should my business offer a car allowance or mileage reimbursement?
The advantage of a car allowance is that it’s very simple to implement and maintain. You give each driving employee X amounts of dollars per month for their expenses and aside from some simple book-keeping, that’s about it.
The major downside of a car allowance is that it’s difficult to have accurate spending. Does your employee really need $300 a month? What about the employee who drove far more miles this month? A fixed car allowance can lead to wasted spending. It can also lead to dips in employee morale.
A mileage reimbursement ensures you’re not wasting money. You’re reimbursing employees for the exact mileage they drive. This is often more efficient for businesses. Employees are happier. They don’t feel ripped off for business expenses.
The downsides of a mileage reimbursement are that it’s historically tough to get accurate mileage logs and expense reports. Modern solutions like MileIQ for Teams enable businesses of all sizes to make mileage tracking and reporting a breeze.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.