Car Allowances vs Company Cars: Pros and Cons

What are company cars?

A company car is a vehicle an employer provides for an employee’s use. Depending on the type of business or an employee’s position, a company car can play a vastly different role. 

For example, in the case of a salesperson, delivery driver, or chauffeur, a car can be an essential tool for everyday work. 

However, for a managerial position in a software company, a car can be a valuable part of a compensation package and a crucial advantage for a company in hiring and retaining top talent.

Regardless of the exact purpose of a company car, the employer usually covers all car-related costs in this model, including gas, insurance, and repairs. Moreover, they can be fully accounted for as tax-free business expenses if the car is used only for business purposes. However, that will require thorough mileage tracking and recordkeeping, so the entire process may be cumbersome when considering all the compliance requirements. 

Car allowance is on the opposite side of the manageability spectrum. It’s a fully taxable compensation that requires only periodic payments at a fixed amount. Overall, it’s much more straightforward but doesn’t allow for any tax optimization.

Benefits of company cars for employees

Having a company car is highly appreciated by employees as it can significantly reduce various costs of purchasing or maintaining a vehicle. In most cases, a company covers all of the expenses, including:

• gas
• repairs
• tires
• tools
• parking fees
• registration fees
• insurance

Because all the costs are covered by the employer a company car is often viewed as a valuable benefit that significantly contributes to employee satisfaction.

Benefits of company cars for employers

From an employer’s perspective, company cars offer control and potential tax advantages. 

By providing company cars, employers can ensure that vehicles used for business purposes meet certain standards in terms of safety, reliability, and brand image. Simply put, businesses can avoid a situation in which an employee visits an important client driving a 1996 Suzuki X-90. A fine vehicle, but perhaps not exactly suitable for every purpose. 

The other upside of owning a company car fleet is treating all car-related costs as business expenses. On top of that, a company may receive an additional $7,500 tax relief for each car with low CO2 emissions in the fleet. It’s a huge difference compared to car allowance, where the entire amount is considered a taxable income. 

And finally, company cars can be a crucial element of a benefit package, especially in highly competitive industries where talent acquisition is very challenging.

Disadvantages of a company car

For employees, the use of company vehicles might be restricted to business purposes only, which can feel inflexible and add to an employee’s commute time (if they need to drop off a car and then go home on their own). Additionally, the need to track mileage was considered quite inconvenient, but the process has become significantly easier with the help of mileage-tracking apps. 

And on the employer’s side, the entire process can be quite costly and time-consuming. Expenses like insurance, maintenance, and fuel add up very quickly, not to mention the initial purchase of the vehicles. Moreover, managing the fleet requires administrative work to ensure all vehicles are perfectly safe and ready to go, which can be particularly challenging with a larger fleet. Company fleets may also be subject to emissions regulations and other standards, which can be cumbersome to keep up with.

What is car allowance?

A car allowance is a cash benefit provided to employees in place of offering company vehicles. In most cases, it is provided monthly, but some companies may offer it bi-weekly or with other frequencies. It aims to cover various expenses associated with business-related transportation, such as rental or lease fees, fuel, maintenance, insurance, and vehicle depreciation. 

Car allowance provides employees with flexibility in managing their work-related travel and expenses. With a fixed amount received regularly, they can decide whether to use it towards acquiring a new vehicle for work, covering costs associated with their existing vehicle, or even spending it on other forms of transportation.

Benefits of car allowance for employees

One of the main advantages of a car allowance for employees is flexibility. Employees can choose a vehicle that suits their personal preferences, needs, and lifestyle rather than having to make do with a standard company car. 

More importantly, they can choose whether to lease a car, rent or simply use the money to maintain their own car. 

Benefits of car allowance for employers

On the employer side, a car allowance can vastly simplify administrative tasks. There are no vehicles to buy or insurance fees to pay, and tracking mileage records is not required. Moreover, payments can be automated, reducing the administrative workload even more. This can result in significant time and resource savings for the employer.

A car allowance is also a fixed cost adjusted for a specific position, which can make budgeting easier. Unlike a company car program, which can have variable costs associated with maintenance, repairs, and insurance, a car allowance provides a predictable expense that can be budgeted for in advance.

Disadvantages of a car allowance

While it’s the easiest way to compensate employees for vehicle use, there are a couple of considerable disadvantages that result from this simplicity. 

Most importantly, car allowance payments are treated as income, so they’re subject to state and federal taxes. It also means that they cannot be deducted as a business expense. Furthermore, if not adjusted frequently, car allowances may stop covering the real cost of transportation for employees, which could result in resentment and dissatisfaction.On top of that, offering a car allowance means having less control over the vehicles being used for businesses. This lack of control means that the vehicles used for business purposes might not meet the company’s standards for safety, reliability, and brand image.

Comparing car allowance and company cars

Having discussed the details of company cars and car allowances, let’s try to compare both options and determine which one would be the best choice, considering factors like:

• Financial implications
• Employee satisfaction
• Operational efficiency
• The role of mileage tracking apps

Financial implications

In terms of finances, both options are fundamentally different. 

In order to provide employees with company cars, you need to acquire them, maintain them, and take care of all the costly and time-consuming processes like registration and insurance. Even considering that all the car-related expenses in this model are tax-deductible, the costs may still be very substantial. 

Car allowances make things much easier and much more predictable. You know exactly how much you will pay each month, and you can prepare for it budget-wise. However, the entire amount is fully taxable, so the model might be far from optimal, especially for employees with transportation needs high above average. 

It’s also worth noting that a company’s long-term needs could play a key role in the decision-making process. For example, going through the entire process of acquiring a company car may be a wrong move if the need for a car (or a fleet) is only temporary. 

Employee satisfaction

This is perhaps the most tricky part because it depends highly on the employee’s specific situation and personal preferences. 

On the one hand, some employees may prefer the freedom of choice that comes with a car allowance. Maybe they simply like their own car that they’ve been driving for years and don’t want to change. On the other hand, the same person may be reluctant to use their beloved car if a specific position in a company requires them to drive to off-road construction sites. 

The industry and employees’ needs always play an important role here. For example, a car allowance can be a perfect solution for professionals who frequently fly to different locations and then need to rent a car on-site, while a company car should be perfect for a regional salesperson who usually drives around the same area. 

There’s also one more potential disadvantage to car allowances. As a fixed monthly amount, it may lead to unfair reimbursements and dissatisfaction among employees who have to drive unusually high distances. 

Operational efficiency

It’s fair to say that a company that decides to acquire and manage a car fleet has to be ready for it from an operational standpoint. It takes quite a workload to ensure that all the cars are legally and mechanically ready to go at all times. Then, it takes diligence from all the employees to collect and keep all the relevant receipts throughout the year. A company has to be ready for those responsibilities.

A car allowance program makes the entire process incomparably more convenient with simple, regularly scheduled payments.

The role of a mileage tracking app

All expenses related to using a company vehicle can be tax-deductible, but it does require providing thorough documentation proving business use. That’s why most companies require employees to track mileage in their company cars. 

The task used to be quite cumbersome just a few decades ago, but with mileage tracking apps like MileIQ, the process can be simplified to just a few taps.

Car allowance vs. company cars — Which one to choose?

The decision between a company car and a car allowance usually comes down to factors like:

• The company’s long-term needs and operational capabilities
• Industry standards
• Employees’ professional needs and personal preferences

Which to choose for business

For businesses, size, employee count, and nature of operations play the biggest role in choosing between a company car and a car allowance. High mileage businesses, for instance, may find a company car program more cost-effective due to potential tax savings on fuel and maintenance costs.

However, smaller businesses or those with low mileage requirements might find a car allowance more feasible. It offers simplicity in terms of management and accounting, plus it provides a fixed monthly expense that can be easier to budget for. 

Which to choose for employees

For employees, personal preferences and financial stability are key. A company car eliminates the need to track mileage and keep receipts. The other option offers freedom of choice and flexibility. Employees can use their allowance entirely according to their preferences. However, car allowances are taxable, so the net benefit may be lower than expected. 

Frequently asked questions

Is it better to get a company car or provide mileage reimbursement?

It may be better to get a company car if your employees travel frequently, as it is more cost-effective for businesses with higher mileage needs. For employees driving less frequently, it may be better to use standard mileage reimbursements.

What is a good car allowance amount?

Car allowance should reflect the approximate costs that an employee bears for their vehicle business use in a given period. A good point of comparison could be the standard mileage rate for business (67 cents per mile in 2024)

What are the tax implications of a company car?

The business use of a company car is not taxable, and related expenses are tax-deductible, but personal use incurs taxes.