Car Allowance vs. Mileage Reimbursement Explained | Which Method Is Right for Your Business?

Dimitri Gedevanishvili

Dimitri Gedevanishvili

Marketing Manager
cars on road, some might be mobile employees

Accurate mileage reimbursements are an important part of any company with mobile employees. With that said, there are several common methods of mileage reimbursement.

Some of the major ones include cents-per-mile, car allowance, fuel cards, and FAVR. Today, we’re going to be discussing the merits and differences between the two of them: cents-per-mile reimbursement and car allowance.

Mileage Reimbursement vs. Car Allowance: What Do They Mean?

Cents-Per-Mile Explained

Cents-per-mile mileage reimbursement is the simplest – and thus more common – method of mileage reimbursement. Employees who use their personal vehicles for work are reimbursed a certain amount of money for each mile driven.

This reimbursement rate per mile can be anything – even nothing! In the United States, there is no federal mandate requiring companies to reimburse their team’s mileage or expenses, though some states have their own specific requirements.

To make things simple, the IRS conducts a study each year on the fixed-and-variable costs of operating a motor vehicle. Using this data, it comes up with a recommendation on what the average driver in the United States should be reimbursed.

Related: IRS Mileage Rate Explained

Costs such as gas prices, insurance, depreciation, and more go into determining this rate. As of mid-2022, the current IRS rate for business mileage is $0.625 per mile.

If a business were to use this rate, that would mean they would be reimbursing their team $0.625 for every mile they drive while conducting business. If they drove 100 miles for their company, they would get $62.50 back from the company.

An important thing to consider is that, unless you reimburse above that recommended IRS rate, CPM reimbursement payments are not taxed. If you reimburse above that rate, the additional payment will be taxed as income.

This method requires your team to fill out mileage logs and submit them to your company to process and approve their reimbursement. Since manual mileage logs are clunky, time-consuming, and inaccurate, we recommend your team use a modern automatic mileage tracker app.

Cons of Cents-Per-Mile

The biggest potential problem that can come with a CPM system is overreported mileage, which can lead to over-reimbursement. According to an internal TripLog study, drivers using manual tracking methods can overreport their mileage by as much as 28%.

Typically, mileage gets overreported when drivers incorrectly fill out their mileage logs, whether intentional or unintentional. They make a poor estimation on how far they drove, and employers end up paying them more than they deserve.

Related: Mileage Guide for Employers

Drivers aren’t the only employees affected by manual mileage logs. Payroll specialists, HR clerks, and others who will be handling those logs are going to have to deal with processing large stacks of paper mileage logs, which can be incredibly cumbersome.

As discussed previously, the best way to avoid overreported mileage is to have your team use a mileage tracker app like TripLog. Schedule a complimentary demo request today to see how TripLog can save your company thousands of dollars and dozens of labor hours per employee every year!

Car Allowance Explained

A car allowance is a fixed amount of money that you give to your team designed to cover the expenses of using their vehicles for work. This is by far the simplest method of mileage reimbursement.

Companies simply set a lump reimbursement sum that they feel is fair and give their employees that sum at the beginning of each month. That’s it!

Cons of a Car Allowance Program

The simplicity of a car allowance program has its benefits, but there are many issues as well. For example, choosing a fair amount of money to provide as an allowance can be difficult.

For many businesses, their employees may drive different amounts. Some employees might drive only a few dozen miles, whereas others may drive hundreds.

If both the employee who drove a dozen miles and the employee who drove 500 miles get a $500 monthly sum, that may result in an unfair system. There’s a good chance you’re going to be underpaying some employees and overpaying others.

Another major issue of car allowance compared to a CPM program is the tax liability. The IRS sees car allowances as compensation rather than a travel reimbursement.

Related: Top 5 Company Mileage Tracker Misconceptions

This means that any money paid to employees as a car allowance is taxable. This also means that your team will see less of the allowance due to it being taxed.

Why is Car Allowance Taxed But Not Mileage Reimbursement?

The main reason why the IRS taxes car allowances is because the business use of these payments are not substantiated. You could substantiate the mileage, but this adds additional complications.

Should My Company Use Car Allowance or Cents-Per-Mile?

At TripLog, we feel the best middle ground between the simpler and more complex methods of mileage reimbursement is cents-per-mile. The main reasons are that it provides drivers with an accurate – and generally fair – reimbursement, and it minimizes tax liability to companies.

Still, one method that might work for one company may not work for another. Deciding what mileage reimbursement method is right for you may be difficult. That’s why the mileage experts at TripLog come in.

Schedule a complimentary live demo with our team to see how our company mileage tracker app and mileage reimbursement solution can help your company continue to succeed. You can also try our mileage reimbursement calculator to immediately see how much you could be saving!

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