Is a Car Allowance Taxable to an Employee?

According to CarsDirect, mileage reimbursement up to the federal mileage reimbursement rate is not taxable, but a standard car allowance is considered to be taxable income. If an employee is not reimbursed for mileage, he or she is allowed to list that amount as a deduction on his or her annual tax return.

If an employee does not drive a company vehicle, he or she may be eligible to be reimbursed for wear and tear on his or her car. When a company offers a car allowance, it is usually in one of two ways.

  1. Standard allowance
  2. CarsDirect states that a standard car allowance is a set amount given to an employee each pay period by the employer. This amount is meant to be used to cover car expenses and is in lieu of the company furnishing the employee with a company vehicle. This type of car allowance is usually considered to be taxable income, and the employee will have to declare it on his or her income tax return and pay taxes on it.

  3. Mileage reimbursement
  4. Instead of a set car allowance, come companies choose to reimburse the employee for the actual miles driven. As of 2015, the federal mileage reimbursement rate is 57.5 cents per mile for business, 23 cents per mile for medical or moving purposes and 14 cents per mile while driving for charitable organizations, as stated on the IRS website. This amount is not considered to be taxable income.