Car allowances are popular among many businesses for a number of reasons. For one, they’re easy to implement. For another, they don’t change a whole lot. Each month, companies reimburse employees who drive for work at a flat rate. But does that car allowance change each year? What’s the average car allowance in 2021?
2021 Average Car Allowance
The average car allowance in 2021 is $575. And, believe it or not, the average car allowance in 2020 was also $575. This allowance may be greater for different positions in the company. Executives for example may receive an allowance of around $800. But for most mobile workers, it’s $575. And it usually is. Car allowances are easy to implement and manage. Perhaps the easiest option. However, they also have a staggeringly high cost to both employers and employees.
The True Cost of the Average Car Allowance
While $575 may be what employers intend to offer employees that drive for work, the amount they take home is far lower. Because the car allowance is not based on any mileage driven, it is not considered a reimbursement, but additional income. This means it is taxed as such. What’s more, employers also have to pay taxes on each allowance. So not only do employees receive less, but employers pay more. This isn’t even getting into the inequity issues of the car allowance approach.
Inequity in the Average Car Allowance
No two employees drive the same amount for work. Their mileage depends on their regions, their routes, their clients: a whole host of possibilities. Those differences expand when employees are driving in different states. A car allowance of $575, that after taxes comes down to $393, might cover the costs of a low mileage driver. On the other hand, a high mileage driver may find themselves choosing between paying out of pocket for gas or just not driving at all.
As mentioned previously, businesses like car allowances because they’re easy. Unfortunately, that tradeoff is a taxable, and often unfair, monthly payment. To address those issues, there are a few options.
Employees continue to receive allowances. However, they also keep records that substantiate business mileage in accordance with IRS regulations. Up to the IRS mileage rate, the allowance will not be taxed. Anything above it will. This approach also puts an administrative burden on employees – creating a drag on productivity.
A New Vehicle Program
Car allowances have their perks. Unfortunately, they aren’t worth the associated costs. Other programs may require more set up, but eventually result in less administrative effort, less taxed payments and less inequity in reimbursement.
Consider the Fixed and Variable Rate (FAVR) program. Companies reimburse employees for the business use of their personal vehicles. That’s not just a cents-per-mile rate. FAVR takes into account both the fixed costs and variable costs of operating and maintaining a vehicle. Each reimbursement is specific to the person receiving it. What’s more, the FAVR program offers flexibility.
What will your company choose?
We’ve shared the benefits and the drawbacks of the car allowance. We’ve shared the average car allowance in 2021, and pointed out why it doesn’t see a lot of change. And we’ve shared less costly alternatives. We don’t have to look too far back in the rear view to think of a time when markets and costs changed dramatically. In times when cost control is essential, companies with vehicle programs that accurately reflect costs have one less thing to worry over. Learn more about FAVR.