Rethinking the $600 Car Allowance

Why the $600 Benchmark Persists

Did you know that most American companies still hand their drivers about $600 a month to cover business vehicle costs, even though a tax-efficient alternative can cut that bill by nearly a third? This article explains how the $550–$700 “going rate” emerged, why a one-size-fits-all number rarely works, and what modern reimbursement models can save for both employer and employee.

Survey data show that U.S. organizations typically anchor their car allowances between $550 and $700, with $600 sitting at the center of the bell curve. The figure feels convenient—easy to remember, easy to budget, and easy to defend in salary negotiations—but convenience can be costly. Because traditional allowances are treated as taxable wages unless administered under an accountable plan, roughly 30% of every dollar evaporates in payroll and income taxes for both sides of the paycheck. The result is a program that looks generous on paper yet undercompensates drivers in high-cost regions and overpays those who drive only modest annual mileage.

What a Car Allowance Is Supposed to Cover

A well-designed program reimburses the predictable, unavoidable expenses that arise when employees use personal vehicles for work: fuel, insurance, depreciation, maintenance, and liability exposure. Companies that skip this step risk unsafe vehicles, regulatory fines, and lower productivity as drivers shoulder out-of-pocket costs or waste time documenting deductions at tax season.

Allowances, Fleets, and Reimbursement Programs

Running a fleet of company-owned cars may feel like the premium solution, but research shows it could cost about 30% more than operating a Fixed & Variable Rate (FAVR) plan. Many organizations compromise by writing a flat allowance check—simple, yes, but far less precise. A pharmaceutical rep who logs 25,000 miles across three states has radically different costs from an urban technician who drives 8,000, yet both often receive the same stipend. 

Flat payments fix predictability for finance while introducing inequity and potential legal exposure in states such as California, Illinois, and Massachusetts, which mandate full indemnification of employee expenses.

Regional and Economic Forces that Move the Needle

Geography matters. Texas drivers often settle for about $560 because lower gasoline and insurance premiums stretch each dollar further. On the other hand, Ohio jumps to roughly $630 as drivers may drive longer distances or other factors. Coastal regions such as New York and Pennsylvania routinely break the $600 line thanks to pricier fuel and a steeper general cost of living. Add inflation—new vehicle transaction prices may climb year-over-year—and a static allowance quickly lags behind reality.

The Hidden Tax Drain of a “Simple” Flat Allowance

Unless your organization requires drivers to substantiate mileage under an accountable plan, the monthly payment is considered by the IRS as ordinary taxable income. Between FICA, FUTA, and the employee’s own tax bracket, about 30 cents of every dollar can disappear before it reaches the gas pump or repair shop. With a car allowance, drivers then must keep mileage logs to claim unreimbursed expenses—paperwork that seldom restores full value and often leads to audit anxiety.

Smarter, Leaner Alternatives

A cents-per-mile (CPM) model aligned with the IRS standard mileage rate is eligible to be tax-free so long as mileage is documented. For organizations with diverse driver profiles, a FAVR program blends a fixed stipend for static costs with a variable rate for fluctuating ones, delivering up to 30% savings and as much as $16,000 back to the budget per high-mileage driver per year. 

Beyond making payments eligible to be tax-free, converting a taxable flat payment to an accountable CPM or FAVR plan can also eliminate payroll tax leakage.

Technology, Compliance, and Continuous Improvement

Mobile mileage capture apps automatically record trips, reduce manual entry errors, and save the average driver about 42 hours a year—time that can be redirected to revenue-generating work. Digital records withstand IRS scrutiny, provide airtight audit trails for state reimbursement mandates, and feed finance teams the data they need to recalibrate rates annually or even quarterly when fuel prices spike.

Putting It All Together

Start by auditing current spend against the $550–$700 benchmark, but do not stop there. Calculate the tax you are surrendering under a non-accountable plan; if your allowance is taxable, assume roughly 30% waste. Pilot a CPM or FAVR model in one region, measure driver satisfaction and actual cost, and then scale once the numbers prove themselves. Finally, pair the new plan with mileage-capture technology and schedule an annual review to ensure your reimbursement keeps pace with insurance premiums, fuel volatility, and IRS updates.

Call to Action

If a flat $600 allowance once felt “good enough,” the data now say otherwise. Switch to a tax-efficient, mileage-driven model and keep up to 30% of your car-program budget where it belongs: on your bottom line. Book a demo with Cardata’s reimbursement experts to see exactly how much you can save.

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.