Company Car vs. Car Allowance: Which is Better for Your Business?

Providing company cars

A company car is owned and maintained by the company, while the employee simply has the right to use it—typically for business travel and, if allowed, for personal trips as well.

This can be an attractive benefit for employees, as they can access a car without the costs or hassles of ownership and operational expenses. However, they also don’t have the freedom to choose the vehicle.

Taxation of company cars can be a pro for the business

From a business perspective, company cars offer tax advantages. The costs of purchasing, maintaining, and operating these vehicles can be depreciated and deducted. However, to claim these deductions, it is essential to document all business-related uses accurately.

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Providing car allowances

A car allowance is money that an employer pays employees to cover the cost of using their personal vehicle for business-related travel. The allowance may cover the purchase price of a vehicle, but in most cases, it will simply cover the costs of fueling, maintaining, and caring for a car.

A car allowance is typically a flat rate paid to employees in addition to their regular pay rate. The employee can choose how to spend the allowance, which will generally be taxed at their regular rate.

Company Car vs. Car Allowance: Key Differences

If you choose to go with a company car program, be aware of the following details:

Ownership	The vehicle is owned or leased by the company.
Expenses	The company covers all related costs, including maintenance, fuel, insurance, and depreciation.
Compensation	The employee is not paid any compensation as the company upholds all expenses.
Taxation	The company can deduct business-related expenses such as the purchase price, maintenance, operational costs, and depreciation. However, if the employee uses the company car for personal purposes, it may be considered a taxable benefit, making it more complex tax-wide for the employee.
Flexibility	Limited flexibility for the employee. The company selects the car model and make. The employee and company may agree to allow personal use in addition to business travel, which makes it more flexible for the employee.
Record-keeping	Keeping records of personal vs. business use is essential for tax purposes so using a mileage tracker app is encouraged.

If deciding on a car allowance plan is a better option for your business, notice how it affects ownership, etc.:

Ownership	The employee owns or leases the vehicle.
Expenses	The employee is responsible for all costs, including insurance, maintenance, fuel, and depreciation.
Compensation	The employee receives a fixed sum from the company, e.g., the car allowance.
Taxation	The car allowance is taxed as regular income for the employee, making it a simpler tax obligation than a company car in most cases. Just be aware that because allowances are classified as wages/income, they may trigger additional payroll taxes (e.g., increased FICA taxes for employees receiving a car allowance). By following the IRS's accountable plan framework, you can turn taxable income into non-taxable income. The process is quite straightforward but will require tracking business mileage. Learn more about accountable plans now.
Flexibility	High flexibility. The employee can choose the car’s make, model, and features and may use any leftover allowance as they wish. In some cases, the allowance can be leveraged for better lease terms. However, after taxes, the allowance may not always cover all expenses.
Record-keeping	Minimal record-keeping is required. However, tracking mileage and expenses for a period may help determine if the allowance sufficiently covers costs, especially after taxation.

Pros and cons of providing company cars

A company car program has several benefits, including eliminating the need for employees to purchase or maintain a vehicle that will be used for business travel. This simplifies accounting for employee expenses. It can also provide you with control over the appearance of vehicles that will be used. In addition, employees generally see company cars as a benefit that can attract new talent and raise employee morale.

However, company car programs have cons, starting with cost. A vehicle fleet is costly to insure and maintain, particularly if it is not being used regularly. A lot of administrative work is involved in managing a vehicle fleet and ensuring it is properly maintained.

Pros & cons:

Pro: No cost is imposed on the employee
Pro: Simplified accounting expenses for employees
Pro: It is generally seen as a benefit and can attract talent
Con: The cost to maintain and insure a fleet can be high

Pros and cons of paying out car allowances

A car allowance is typically simple to manage. The company does not need to deal with administrative hassles such as maintaining, repairing, or insuring a vehicle. In addition, employees can decide which car they’d like and whether it should be bought or leased. This offers a considerable degree of flexibility for both the company and its employees.

Unfortunately, standard car allowances are taxable, which can significantly reduce your employees' take-home pay. You can turn taxable income into non-taxable income. It will require that employees track their business-related mileage and document that the car allowance does not exceed the amount allowed by the IRS business mileage rate. Learn more about the IRS’ Accountable Plan.

We recommend automating mileage tracking on a company level with an automatic mileage tracker app for even less administrative burden.

Pros & cons:

Pro: Simple to manage and no administrative burden for the company
Pro: High flexibility for the employee in terms of ownership and usage
Con: Car allowance is considered income and is taxable, which can decrease the value of the allowance

What you should choose - Company car or car allowance?

When it comes to company car vs. car allowance, both can offer significant advantages.

A company car can help recruit talent, as many employees consider it a benefit. Additionally, it can allow you to control the image your employees project when on the road.

Conversely, a car allowance comes with fewer administrative costs as the company doesn't need to purchase, insure, or maintain vehicles.

As for the tax implications of a car allowance vs. a company car, whether you choose a car allowance or company car, you can claim a tax deduction by tracking your employees' business-related vehicle use, including mileage.

This is necessary to avoid taxing employees and to allow you to write off reimbursements as business expenses. Learn more in our guide, Mileage Reimbursement Rules for Employers.

FAQ

How is company car tax calculated?

A company car is a business asset. Therefore, the company will depreciate the car if it purchases the vehicle. The company can also deduct expenses for the vehicle, such as fuel, insurance, and maintenance, even those that were for the personal use of the car.

How do I calculate car allowance for employees?

The best way to calculate a car allowance is to first consider all of the business-related car expenses your employees will have, such as fuel, maintenance, and insurance. Then, do some research to find out the average for these costs in your area. After finding the average costs for each expense, add the costs together to determine the car allowance.

How much is a typical car allowance?

In the US a typical car allowance is somewhere between $500 and $700 per month, but as described in this article you should base the allowance on the expenses related to business driving, rather than a national estimate.