Why a car allowance is never a good option for business driving
Car allowances are inherently wasteful, because they are assessed for both payroll and income tax, and better options exist to reimburse work driving.
What is a car allowance?
A car allowance is a payment made by employers to employees for using their personal vehicle at work. It is paid in advance for driving. It is the same amount every month. The full allowance payment is taxed as income. It does not accurately reimburse for driving for work.
How do you administer a car allowance plan?
The employer chooses an amount of money to pay on a monthly basis to the drivers they deem eligible. Companies generally pay these together with paychecks.
Why do companies choose allowances?
Companies only pay allowances when they are unfortunately unaware of the other, better options available in the market.
There are a variety of options for vehicle programs that are non taxable. These programs are better for managers and drivers, and when outsourced to Cardata they create no extra work for administrators.
What does Cardata think?
Under no circumstances does Cardata recommend car allowances. Although easy to administer, they are not tax efficient and they are not fair to drivers.
Also, they disincentivize driving, because they often run out before the end of the month. Salespeople should not be made to pay out of pocket for legitimate business driving. Car allowances mean missed sales calls and forfeited business.
If you want a program that resembles a car allowance plan, you can pay the Tax-Free Car Allowance through Cardata. It is very similar, but it has less tax waste, and leaves your company and your drivers with more money at the end of the month.
With all that in mind, we gave car allowance programs a score. Allowances received a poor grade of 2/9. They are easy to administer, but cost drivers and management in tax waste, leaving both employees and employers financially worse off.