The $600 Car Allowance Myth: Structuring Fair and Compliant Reimbursements

Introduction

Did you know that the average U.S. car allowance is only about $600 a month? That single figure, while convenient, conceals major regional, tax, and program-design variables that can make the same $600 feel either generous or painfully short for different drivers.

The goal of any car-allowance policy is to reimburse employees fairly while protecting the company’s bottom line. Yet the “standard” $600 benchmark can mislead finance, HR, and fleet managers because it ignores how geography, taxation, and program structure alter both employer cost and driver take-home pay. By unpacking those variables, read on to see why the right question is not “is $600 enough?” but “what structure delivers equitable, compliant, and efficient reimbursement for our workforce?”

Benchmarking the $600 Myth

Nationally, $600 represents the midpoint of published flat allowances in states such as New York, Ohio, and Pennsylvania. For a sales representative covering 25,000 business miles, that allowance works out to roughly 28–29 cents per mile—less than half the 2025 IRS standard of 70 cents. The gap is not necessarily a sign of underpayment; in certain regions, such as Texas, employers tend to settle closer to $560 because fuel, insurance, and depreciation are cheaper. Conversely, drivers based in high-cost metros like New York City or San Francisco often receive allowances north of $630 to offset parking, tolls, and elevated insurance premiums. 

Industry also matters: construction firms routinely convert allowances into a CPM near 28–29 cents, aligning with $600 for crews that rack up 25,000 miles a year. Layer on increases in new vehicle prices and the “average” looks even less reliable.

Why Structure Matters

How an allowance is delivered often changes driver outcomes more than the headline dollar amount. A taxable flat allowance, the simplest model to administer, is treated as ordinary wages unless the company operates an accountable plan; roughly 30 percent of each $600 payment disappears to income and FICA taxes, leaving the employee with only about $420. 

By contrast, a Fixed and Variable Rate (FAVR) program divides reimbursement into a fixed monthly ownership component and a variable cents-per-mile amount. When it follows IRS rules and requirements, the entire payment is eligible to be tax-free. Organizations that have migrated from taxable allowances to FAVR could potentially save an average of around $16,000 per high-mileage driver each year, all while improving net driver pay. Accountable flat allowances and standard IRS Cents-per-Mile programs can also be effective, but they require meticulous mileage logs—business purpose, dates, and odometer readings—to preserve tax-free status alongside other requirements.

Legal and Compliance Considerations

Federal law does not set a minimum allowance, but three states—Illinois, California, and Massachusetts—mandate “full and necessary” expense reimbursement, effectively forcing employers in those jurisdictions to document that payments cover actual costs. 

Everywhere else, $600 remains a convention rather than a mandate. Even so, companies that ignore regional cost differences risk morale problems, recruiting challenges, or even constructive dismissal claims if drivers believe they are subsidizing company business with personal funds.

Best Practices for 2025

The first step in right-sizing an allowance is quantifying true ownership and operating costs. AAA pegs average annual maintenance at $792 and depreciation at $4,551; any program that fails to cover those basics is underfunded on day one. Because the IRS has adjusted its standard rate mid-year only four times since 1999, internal reviews—not federal updates—must catch inflationary spikes in fuel or vehicle prices. Many firms now pilot a FAVR program or hybrid models with a subset of drivers, validate projected savings, and then roll out a full program. 

Technology accelerates that process. Mileage capture apps could save the average field rep 42 hours a year and remove guessing from reimbursement claims. When paired with cloud analytics and telematics, companies have cut fuel spend by up to 55 percent. Looking ahead, accelerating adoption of electric vehicles—whose operating costs can be 55 percent lower than gasoline counterparts—will force variable-rate recalibrations. At the same time, inflation argues for at least annual allowance reviews.

Actionable Next Steps

A pragmatic roadmap begins with an audit of your current program’s effective cents-per-mile and its tax status. Modeling costs under three scenarios—taxable allowance, accountable allowance, and FAVR—clarifies the trade-offs between administrative effort, employer cost, and driver net pay. Automated mileage tracking supplies the data necessary for accurate modeling, and scheduling annual or semi-annual reviews ensures the program keeps pace with regional fuel prices, vehicle-price inflation, and a shifting mix of gasoline, hybrid, and electric vehicles.

Call-to-Action

Companies that have switched from taxable stipends to a well-managed FAVR program or hybrid program can trim total program spend by about 30 percent while boosting driver take-home pay. To find out what that could look like for your organization, contact Cardata for a personalized demo.

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.