The Hidden Costs of the Average $600 Car Allowance

Did you know that plenty of U.S. companies still hand their employees a flat $600 vehicle allowance every month, even though every single dollar is subject to payroll and income tax for both the employer and the driver? This article shows why that static, fully taxable figure isn’t always an accurate representation of actual driving costs. Plus, explore how data-driven, tax-free programs such as Fixed and Variable Rate (FAVR) reimbursements can cut total costs by as much as 30% while leaving drivers better off.

Introduction

Years of inflation, soaring new vehicle prices, and more have quietly eroded the buying power of the traditional taxable flat-rate car allowance. Although we’ve found $600 to be the amount of a typical car allowance, the tax drag alone removes roughly one-third of that payment from the pockets of both the company and the employee, which can turn what looks like a generous stipend into a costly mirage. In this situation, organizations that cling to flat payments like this can risk over-spending, under-reimbursing, or both.

Industry Benchmarks

Construction firms can feel this pain acutely. Their drivers rack up heavy mileage in large, often four-wheel-drive vehicles, pushing the typical allowance to about $975 per month, of which roughly $680 covers fixed costs such as depreciation, insurance, and licensing. The remaining per-mile payments cover fuel and maintenance. 

Sales and field-service teams sit in the middle of the cost spectrum, with their allowances hovering close to the average $600 allowance rate. Many already tap into on outsourced vehicle reimbursement programs calibrated within IRS requirements so that the payments remain tax-free. Where these firms gain additional leverage is productivity: automated mileage tracking apps and powerful software can eliminate about 42 hours of work per driver annually, freeing administrative time that can be reallocated to customer engagement, head-count expansion, and other important projects. Hybrid policies—FAVR for high-milers, cents-per-mile (CPM) for occasional drivers—are another option that can help ensure equity without inflating budgets.

The lesson is clear: sectors with heavy vehicle utilization unlock outsized savings when they replace taxable stipends with variable-rate models that more accurately track fuel and tire movements while anchoring fixed payments to actual depreciation curves.

Regional Cost Pressures and Compliance Risk

Industry matters, but so does geography. California, Illinois, and Massachusetts enforce “necessary expense” statutes that compel employers to compensate workers for job-related driving costs; and flat allowances—especially once taxes erode them—can often fall short of that legal standard. In California, Labor Code § 2802 exposes violators to repayment of under-reimbursed amounts, interest, and attorneys’ fees. Illinois allows treble damages for willful non-compliance, while Massachusetts layers on civil fines and private lawsuits.

Cost differentials add another layer of complexity. In Texas and much of the South, average allowances hover near $560 because lower fuel prices, cheaper insurance, and slower depreciation soften the blow of vehicle ownership. By contrast, drivers in the Northeast and on the West Coast face higher insurance premiums and congestion-related wear, pushing break-even reimbursements up by $50 to $75 a month in markets such as New York City. FAVR programs shine here because their variable component can swing alongside changes. For example, if diesel spikes in California while unleaded in the Gulf Coast drops, a FAVR program can help ensure that high-cost regions are not subsidized by low-cost ones and vice versa.

Economic, Safety, and Sustainability Levers

Macroeconomic trends tilt the scales even further toward data-driven reimbursement. New car prices can rise as much as around 22% annually, while used car prices can increase as much as roughly 25%, making fixed ownership costs the dominant share of any accountable FAVR program. Because FAVR indexes the fixed payment to the depreciation curve of a specific vehicle class, drivers receive enough money to cover realistic loan or lease expenses without the company inadvertently funding luxury cars.

Fuel efficiency and route optimization through mileage tracking can deliver additional savings by promoting efficient business mileage, helping to cushioning spikes in the variable rate.

Sustainability goals add one more incentive. Electric vehicles can reduce annual maintenance costs, as well. For example, the City of New York analyzed their fleet expenses and found that electric vehicles cost only around $400 in annual maintenance, compared with roughly $1,600 for gasoline models. This can help slash the variable rate and helping firms hit targets without subsidizing personal commuting. 

Moving from Allowances to FAVR

The path forward starts with taking a look at your current stipend, and comparing it against not just the average $600 car allowance, but also looking to see if a flat-rate allowance is the best option for your company. A straightforward cost-benefit analysis that compares different vehicle reimbursement programs, including tax impacts, flexibility, compliance, and more, are a strong best practice to see whether a compliant FAVR vehicle reimbursement program could be worthwhile. Beyond providing non-taxable reimbursements when eligible, FAVR can also provide more accurate reimbursements for employees that reflect genuine expenses.

Conclusion

Flat allowances once felt simple, but simplicity is no longer cheap. When taxes, regional disparities, and more are fully accounted for, the old $600 check turns out to be among the most expensive ways to reimburse a mobile workforce. Data-driven, tax-free models such as FAVR reimbursement programs can better match reimbursement to reality, potentially unlocking double-digit savings while protecting both the company and its drivers. If your organization is still mailing out taxable stipends, the question is no longer whether you can afford to modernize—it is whether you can afford not to.

Disclaimer: Nothing in this blog post is legal, accounting, or insurance advice. Consult your lawyer, accountant, or insurance agent, and do not rely on the information contained herein for any business or personal financial or legal decision-making. While we strive to be as reliable as possible, we are neither lawyers nor accountants nor agents. For several citations of IRS publications on which we base our blog content ideas, please always consult this article: https://www.cardata.co/blog/irs-rules-for-mileage-reimbursements. For Cardata’s terms of service, go here: https://www.cardata.co/terms.