What Is the Difference Between Getting a Company Car and a Car Allowance?

Company cars belong to the employer, often through a fleet lease arrangement with a car dealer or manufacturer, and the employer allows the employee use of the car. Employers usually pay costs associated with the car. With a car allowance, the employer pays the employee money to be used for car expenses. The employee provides the car and handles car costs out of the car allowance.

Car allowances that strictly separate business and personal use do not count as employee income but do count as employer deductible business expenses. For example, an allowance that reimburses employees for documented miles driven for work is in this category. Other car allowances that do not separate business and personal use count as employee taxable income and are not a company business expense. An example of this would be a company providing an employee a flat stipend to use a personal car for work.

For employers, company cars establish liability concerns, as courts do not distinguished between business and personal use of company cars. A car allowance means that the employee assumes liability at least part, if not all, of the time.

For employees, a company car means restrictions on vehicle choice, as the employer decides on the car. Additionally, the company car does not provide the employee with an asset or credit record. If the employee with a car allowance does not want the added responsibility of car maintenance, a personal lease provides maintenance and housekeeping options.