When companies have employees who use their personal vehicles for work, many choose to offer reimbursement for miles that they drive while conducting business.
Two common options are a flat car allowance and a fixed and variable rate (FAVR) program. Other methods include cents-per-mile and company-owned fleet.
Both car allowance and fleet provide money to employees for business vehicle use, but they work very differently. Here’s what companies need to know.
Key Points
- A traditional car allowance is an employee mileage reimbursement method that provides a fixed monthly payment for personal use of a vehicle for business purposes.
- Car allowance payments will almost always underpay some drivers and overpay others. Additionally, the overwhelming majority of car allowance payments are not tax-free.
- A properly set up FAVR program provides fair, tax-free reimbursements based on local vehicle costs.
- FAVR can be more complicated to manage and has stricter eligibility requirements.
- Companies can use FAVR for some drivers and other reimbursement methods like cents-per-mile for others.
What Is a Car Allowance?
A car allowance is a fixed payment for an employee who uses a personal vehicle for work, usually paid monthly through payroll. For example, a company might give each field employee $600 per month, regardless of how many business miles they drive.
For lighter-mileage drivers, this can result in a significant amount of money going into their pocket. For high-mileage drivers, that may not even cover gas, let alone other vehicle-related costs like maintenance and depreciation.
Related: Mileage Reimbursement Method Comparison
With that said, car allowances are easy to understand, predictable, and simple to administer. The drawback is that their payments are usually taxed (unless set up with an accountable plan) and usually have little connection to an employee’s actual costs.
A high-mileage driver in an expensive market may receive the same payment as someone who drives occasionally in a lower-cost area.
What Is FAVR Reimbursement?
FAVR stands for “fixed and variable rate”. It’s an IRS-approved method for reimbursing employees who use their own vehicles for business.
Instead of paying everyone the same amount, FAVR separates vehicle expenses into two groups.
Fixed Costs
The fixed payment is essentially a lump sum that’s meant to cover ownership expenses such as depreciation, insurance, registration, license fees, and taxes. It’s based around a standard vehicle and localized cost data.
An example of a fixed cost to an employee would be $412 dollars a month.
Variable Costs
The variable payment is calculated using business mileage and helps cover fuel, maintenance, oil, tires, and other costs that are tied directly with the vehicle’s use and operation.
Variable costs are paid in the form of a per-mile rate. An example rate would be $0.21 paid to the employee per mile.
Example FAVR Calculation
Taking the two examples above, an example end-of-the-month FAVR payment would give that particular employee $412 plus $0.21 * (their total mileage).
If they drove 600 miles that month, the payment would be 412 + (0.21 * 600) = $547.
Related: How to Calculate a FAVR Allowance
FAVR vs. Car Allowance at a Glance
The Biggest Differences Between FAVR and Car Allowance
Tax Differences
A traditional car allowance is usually paid through payroll as taxable income. Employees then lose part of the payment to taxes, and employers generally pay payroll taxes on it as well.
FAVR reimbursements can remain outside taxable wages when the program follows IRS rules and employees properly document their business driving. This allows more of the company’s vehicle spending to reach the employees as reimbursement.
Related: Are Employee Expense Reimbursements Taxable?
Accuracy and Fairness
Flat car allowance payments are often based on little information, if any. They don’t usually change based on how much an employee drives or what vehicle costs are like in their region.
That can often lead to overpaying some employees while underpaying others. FAVR addresses this by using localized costs to inform payments. Additionally, FAVR uses a standard vehicle profile rather than reimbursing each employee based on the exact vehicle they chose to buy.
Management
Car allowances are usually relatively easy to manage because the same payment can be added to payroll each month. Many companies can handle this method themselves.
FAVR requires mileage tracking, driver eligibility checks, vehicle and insurance information, localized cost data, and ongoing program management. Finding and managing all of that can be expensive and difficult without dedicated software.
Given that, most companies use a dedicated FAVR provider instead of administering the program internally. However, FAVR has stricter eligibility requirements than car allowance.
The IRS requires a FAVR plan to cover at least five employees throughout the year, and drivers must substantiate at least 5,000 business miles annually (or 80% of the program’s assumed mileage when that figure is higher).
When to Choose Car Allowance vs. FAVR
Car allowances work best when companies have a small number of drivers, travel is limited, or employees have similar/consistent driving patterns. Beyond that, car allowance payments can become wildly inaccurate.
FAVR is best when employees drive a significant amount of business miles and/or work across different regions. Companies often choose FAVR for its fairness as well. Rather than receiving taxable allowances, reimbursement payments to employees are accurate and tax-free.
However, the right answer isn’t always company-wide. The correct method depends on the type of driver.
Can Companies Use More Than One Mileage Reimbursement Method?
Every driver doesn’t need to use the same reimbursement method.
Eligible higher-mileage drivers can participate in FAVR, while occasional or lower-mileage drivers can use another tax-free method like cents-per-mile using the IRS mileage rate.
Related: Car Allowance vs. CPM Explained
Switching From Car Allowance to FAVR
Employees can continue using their personal vehicles when a company moves from a car allowance system to FAVR. What changes is how reimbursements are calculated and documented.
They should understand that FAVR reimbursements cover business vehicle costs and why payments may differ between drivers.
How TripLog Helps Manage FAVR
TripLog combines automatic mileage tracking with employee reimbursement management. Employees record their business trips automatically with the TripLog mobile app, while admins can review mileage, manage approvals, and maintain detailed reimbursement records.
TripLog also lets companies manage FAVR and cents-per-mile programs in the same system. Higher-mileage employees can receive localized FAVR reimbursements while lower-mileage drivers use the simpler CPM method.
Related: Cents-Per-Mile Reimbursement vs FAVR - Which Is Right for Your Business?
FAQ
Is FAVR better than car allowance?
FAVR is better for companies with higher-mileage drivers, employees in different regions, or who have concerns about reimbursement fairness and tax waste. A car allowance may be right when business driving is limited and simplicity is the main priority.
Is car allowance taxable?
A traditional car allowance is treated as taxable income unless done under an accountable plan. Most car allowance programs are not set up this way and are thus taxed.
Is FAVR tax-free?
FAVR reimbursements are tax-free when the program and participating employees meet IRS requirements. Using a dedicated FAVR solution is the best way to ensure proper setup.
Can low-mileage drivers use FAVR?
FAVR is not for low-mileage or occasional drivers, and employees who don’t meet its mileage requirements won’t qualify. Those drivers can use cents-per-mile reimbursement instead.
FAVR vs. Car Allowance: Conclusion
Car allowances are simple and predictable, but they’re usually taxed and don’t reflect what employees actually spend to drive for work.
FAVR requires more structure, but it provides localized, mileage-based, tax-free reimbursements when IRS requirements are met. For companies with higher-mileage teams, that extra precision may be worth the additional setup.
Curious about transitioning from car allowance to FAVR, or are you starting completely from scratch? Talk to the mileage experts at TripLog to get your team setup with the right plan for your team!
