If your employees drive their personal vehicles for work, offering a vehicle stipend or a car allowance is a flexible, straightforward option to help ease the cost of maintenance, It’s important to understand, however, the difference between a vehicle stipend and mileage reimbursement programs—and how their tax structures can impact your business and employees. This article will break down those key differences to help employers navigate which vehicle allowance or reimbursement program is right for their business.
What is a vehicle stipend?
A vehicle stipend is a fixed monthly car allowance for employees to help cover the cost of using their personal car for work, including gas, insurance, and general maintenance.
Vehicle stipends allow employees to drive their own car for business trips instead of being restricted to a company-owned fleet, which can be costly and difficult to manage for employers. Plus, allowance programs are less risky, since there is greater insurance risk when employers own fleets.
There are three kinds of reimbursement programs:
Fixed and Variable Rate (FAVR): A FAVR program considers fixed and variable costs, providing a comprehensive framework for employees to navigate transportation expenses. By factoring in elements such as insurance, depreciation, fuel, and maintenance, the FAVR program ensures an accurate reimbursement structure tailored to the unique needs of each individual. In short, FAVR mitigates the burden placed on employees and fosters a sense of financial stability within the organization using the program.
Accountable Allowance: Also known as a Tax-Free Car Allowance, under this system, employees receive a sum for transportation expenses, which they must compare to the IRS rate to determine taxability. Accountable Allowances safeguard against misuse and allow employees to tailor their reimbursements to travel patterns, all within the parameters established by the Internal Revenue Service (IRS) within document 463.
Cents per Mile (CPM): A simple, IRS-compliant program that’s easy to implement, the Cents per Mile approach streamlines reimbursement by compensating based on per mile traveled. With minimal paperwork and documentation, CPM simplifies the administrative burden for employees and employers; it’s straightforward and unambiguous.
For 2023, the standard mileage rates for the use of a vehicle are:
- 65.5 cents per mile driven for business use,
- 22 cents per mile driven for medical or moving purposes for qualified active-duty members of the Armed Forces, consistent with the increased midyear rate set for the second half of 2022,
- 14 cents per mile driven in service of charitable organizations.
How are vehicle stipends and reimbursement programs taxed?
The tax implications of a vehicle stipend depend on the structure of the program.
Unless employees track their exact mileage under an accountable plan, the IRS considers car allowances to be compensation, and therefore taxable income—so drivers and employers both end up with less.
A Fixed and Variable Rate (FAVR) reimbursement program, however, allows employers to reimburse employees without tax, but a well-designed FAVR program is not necessarily tax-free. Drivers must comply with the three main tax rules on the FAVR program:
● Vehicle Cost Compliance,
● Vehicle Age Compliance,
● The 5,000 Mile Rule.
If drivers comply with these rules, they will not be assessed any taxable income on their FAVR reimbursements. If they don’t, an IRS formula will be applied to test their reimbursement for tax.
How does a vehicle stipend work?
Vehicle stipends can be distributed in several ways. Companies will either offer employees a payment in advance, like an allowance, or a reimbursement in arrears, like a vehicle reimbursement program.
A standard vehicle stipend or car allowance is usually included in a paycheck. The employee can then decide what to use the money for—gas, wear and tear, or other costs. Employees who receive a standard car allowance aren’t required to track and record their mileage or substantiate their vehicle use—it’s essentially a perk. But exceeding the allowance can complicate things.
What jobs offer a vehicle stipend?
A car allowance or vehicle stipend may be an executive perk, but plenty of roles across sectors require that employees use their personal vehicles on the job, including outside sales reps across sectors including pharmaceuticals, F&B and alcohol distribution, merchandisers, delivery drivers, field technicians, and management consultants. Essentially, any job that requires employees to travel by car for work qualify for a stipend.
What is a gas stipend?
A gas stipend is a fixed monthly reimbursement for employees for gas. Technically, companies can distribute gas cards as fuel stipends, but they’re taxable unless employees track and record their exact mileage. Plus, distributing third-party gift cards over direct compensation can get complicated when complying with IRS tax guidelines.
What is the average vehicle stipend?
An internal analysis finds that the average vehicle stipend is around $600 per month. That said, stipends are somewhat arbitrary and may only go so far, depending on the employees’ actual vehicle use. And remember, when you use a taxable allowance, you lose on average 30% to tax waste.
Vehicle stipends are straightforward, flexible and easy to implement. They eliminate the need for a company car, allow employees to drive their own vehicles, and don’t require employees to track and record their mileage. But they’re also taxed, so employees and employers lose out. Plus, allowances can be arbitrary and may not reflect accurate driving expenses without mileage tracking. Tax-free alternatives like FAVR programs include all the benefits of allowances and reflect real-time mileage data. That’s why they’re Cardata’s choice for maximizing savings and fostering fairness across organizations.
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 or 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.