Manage my business

Is a Car Allowance Taxable Income?

If you use a personal car for business reasons, your employer may provide a car allowance each month to cover those costs. But, many people wonder: Is a car allowance taxable income?

What is a car allowance?

A car allowance is a set amount an employer gives to employees to compensate them for using their car for work reasons. This can be doled out on a monthly, quarterly or yearly basis. A car allowance is meant to cover expenses like wear-and-tear on your car, fuel and gasoline costs, repairs and more.

Example: Josh is a traveling salesperson for Tables R Us. He receives $200 a month to compensate him for his use of his own car for his door-to-door sales. This amount doesn’t change regardless of how many miles he drives.

Is a car allowance considered taxable income?

Employees don’t have to pay taxes on a car allowance if it’s a part of an accountable plan. An accountable plan includes expense allowances that:

  • Have business connections
  • Require substantiation
  • Excess amounts are returned in a reasonable time

What are the tax ramifications?

With an accountable plan, companies do not report car allowance and mileage reimbursement as pay. Make sure you and your employee are aware of how they’re keeping track of your car allowance.

About the author

Marin Perez

Marin is part of the marketing team at Microsoft. He's excited to see how entrepreneurs can better start, manage and grow their businesses.

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                    The Growth Center does not constitute professional tax or financial advice. You should contact your own tax or financial professional to discuss your situation.