What is the difference between Car Allowance and Mileage Reimbursement?

Mileage expenses make up a large part of the travel expense report. Some employers require you to drive your vehicle for business travel to manage its professional mission and offer you mileage allowances in exchange for using your vehicle. Other companies often provide such benefits in the form of a per-mile reimbursement plan or a fixed amount per vehicle.

How do these options differ and what characteristics do they have? Learn more in this article:

  • What is the difference between a car allowance and a mileage reimbursement ?
  • What are the Pros & Cons of car allowance? 
  • What are the Pros & Cons of mileage reimbursement?
  • What is Mileage Tracking & Reimbursement Solution ?

What is the difference between a car allowance and a mileage reimbursement?

The difference between these two options is that a car allowance is a periodic allowance paid to an employee for the use of a vehicle and is usually taxable. And the mileage reimbursement is the rate in cents per e multiplied by the employee's monthly mileage. If the amount is equal to or less than the standard IRS (Internal Revenue Service) rate, mileage reimbursement is tax-free. 

To understand it better, let’s take a closer look at how it works:

Car allowance option

One employee uses a personal car for visits to clients. The company gives him a set amount over a given time for these expenses, so that employee could cover the costs of using his car. This amount has to cover things like fuel, wear-and-tear, tires, and more. The most important is that the amount doesn’t change each month, no matter how far his clients are.

Mileage reimbursement option 

Here is the same example when an employee is driving a personal car to visit clients for work. But in this case, he tracks the business miles every month and includes it with his monthly expense report. Then the employee is reimbursed based on how many km/ miles he drove the previous month.

 

What are the Pros & Cons of car allowance? 

The most significant advantage of car allowance is that it is more understandable and less time-consuming for employees and organizations as well. It is a simple and straightforward program to set up. Once the amount of the car allowance is determined, as well as how and when employees will be paid the car allowance, the system is ready to use. 

But on the other hand, it can be difficult for companies to set car allowances that are fair to all employees. If one employee drives hundreds of miles with his car for work and other employees use their vehicles much less frequently, it can create an inequitable allowance.

Because neither of the two employees will drive the same distance each month, one employee will inevitably be underpaid and the other will be overpaid. Even so, your employer must be careful not to set the allowance too high, because then they will be paying employees for trips they never took, which is already seen as an expense fraud case. Also, if employees are spread out over different regions where car costs vary, it can make the system imbalanced.

 

What are the Pros & Cons of mileage reimbursement?

Mileage reimbursement is much more precise and fair to all employees than having the fixed amount paid per vehicle. With this option, employees are reimbursed for exactly what they drive, and there are no overpayments or underpayments for employees who are using the car more or less than other employees in the company.  

Another significant benefit is that mileage reimbursement is not taxed like a car allowance. If you keep a mileage journal to verify the distance you drive on business, the reimbursement is not considered income and, therefore, not taxable so companies can deduct this compensation from their taxes. 

At the same time, employers should be careful with mileage reimbursement. If employees made a mistake in calculation,  the company may end up giving an employee too much money, a disadvantage that affects your bottom line.

 

Mileage Tracking & Reimbursement Solution

Considering the above benefits of using mileage reimbursement for organizations, it should be noticed that more and more companies today are switching to this option. The fact that it is a tax-free, fair to all employees, and very clear program, attracts a lot of businesses. To simplify this mileage reimbursement process and fight fraud, organizations are using a mileage-tracking app like Jenji.

With a simple swipe of a smartphone, your employee can classify his car trips as business or personal, choose between mile or km and add everything in a very easy-to-use app. Then he can easily take a picture of the receipt and all needed information for the expense report will be automatically added. It couldn't be easier!

With an expense management solution like Jenji, the company can forget about employee fraud, can have a nice online app instead of tons of paper, and can be relieved regarding VAT topics. 

Do you want help understanding how to maximize other potential business expense deductions?   Reach out to our team at sales@jenji.io and they will be very happy to assist you and answer all your questions.

Maria Khizhniakova