Car Allowances Vs. Mileage Reimbursement

Mileage reimbursement and car allowances are two ways in which vehicle owners may be compensated for using their personal vehicle for business purposes. It may be offered to employees who need to drive in the course of their job, such as a salesperson or computer repair person, instead of providing the employee with a company vehicle. The individual generally has complete control over how the money he receives is used.

Basic Difference

With mileage reimbursement, individuals may be compensated at a specific rate per business mile driven as determined by their employer. With a car allowance, individuals receive a fixed dollar amount per month from their employer to cover vehicle expenses, including making a car payment if applicable. In some companies, those receiving a car allowance may be able to get mileage reimbursement in addition.

Vehicle Use

Individuals will receive mileage reimbursement only for miles driven for business purposes and not for any personal use. In general, they will only be compensated for driving from home to a work site and back, such as a salesperson driving to appointments, and not for commuting to and from an office. A car allowance is paid regardless of how much or how little the vehicle is used for business.

Vehicle Expenses

With mileage reimbursement and a car allowance, any required vehicle maintenance is the responsibility of the vehicle owner. With a car allowance, individuals may or may not be required to pay for gasoline, depending on the policy of their employer. In both cases, the individuals will also be required to purchase their own insurance, which can be more expensive when a vehicle is used for business. In some cases, such as when a vehicle is used for delivery, the insurance carrier may require that the individual obtain commercial insurance coverage.

Tax Ramifications

In the case of mileage reimbursement, the dollar amount received is not taxable as income, as long as it does not exceed the IRS limit, which is 55 cents per mile in 2009. A car allowance is considered as taxable income, but the mileage driven may be tax-deductible. For more information as to vehicle tax guidelines, visit http://www.irs.gov/publications/p463/ch06.html

Employer Restrictions

Some employers may place restrictions as to the miles driven for mileage reimbursement. For example, an employer may not pay for the first 20 miles driven per day. With a car allowance, such restrictions typically do not apply, since the car allowance is the same regardless of how much the vehicle is used for business.

References

• IRS.gov
• ThePerfectPayPlan.Typepad.com

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