What do I do with a car allowance every month?

December 22, 2008 5:49 PM

My company is very eager to give me a car allowance. I wanted a raise. They countered with a lower raise, but added in a car allowance to bring the total higher than what I asked for. Why?

My understanding is that a car allowance will be taxed like regular income. Talking to co-workers, some use part, all or none of their car allowance for actual automobile related expenses. They simply deposit it into their bank account if they don't use it. A car allowance is taxed as regular income, isn't it? Does the employer get taxed less on this? They seem to be really be pushing this, and on face value it looks better than what I originally asked for, I don't want to bite the hand that feeds me.

I do not use my car on business a lot, and if I were to accept this I probably just hole the money away, what's the deal here? Do I get hit with a large tax liability I don't know about? For the life of me I can't figure out why they'd go through the additional processing to cut me a check every month, and not just give me the raise I asked for. It leads me to believe they get some sort of tax benefits, but I could just be paranoid or wrong.

posted by anonymous to work & money (18 comments total)

Absolutely check up on the tax issues and make sure you're covered. However this could be the case of payroll saying the company cannot afford to give raises in this economy and issuing a freeze on salary increases. While at the same time another department OKs an increase in expenses that are expected to increase corporate efficiency or profitability. If that's the case it's likely a matter of your boss(es) realizing you deserve more and wanting to retain you, but also having to work within the rules payroll sets down.

It's convoluted, confusing, and ridiculous but not abnormal for larger corporations with many departments.
posted by Science! at 6:10 PM on December 22, 2008 [1 favorite has favorites]

My guess is that it came out of a different pot of money so they wouldn't go over budget on salary, but were able to give you the raise you deserved, or else the higher salary increase was nixed, so they did this instead. G-d bless' em. Taxes shouldn't be any different. Your income bracket is your income bracket, wherever the money comes from.
posted by nax at 6:12 PM on December 22, 2008

Sorry, the increase in a car allowance could be expected to bring more income/customers/leads/etc to the company by increasing your flexibility and ability to get a job done, where pay raises might only have been allocated as rewards. Different classifications of expenses for company.
posted by Science! at 6:14 PM on December 22, 2008

Not sure about an "allowance" per se, but I get reimbursed for my vehicle usage and it is not taxed. The reason being that it is not "new" money, but them simply paying me back for expenses I already paid out of post-tax income.
posted by gjc at 6:18 PM on December 22, 2008

This needs to be checked with a CPA or a tax lawyer. Complicated question.
posted by Ironmouth at 6:22 PM on December 22, 2008

There might be state salary-based employer-paid taxes that they don't have to pay on a "car allowance"?
posted by Jacqueline at 6:49 PM on December 22, 2008

I'm not sure about all the tax implications, but do clarify if anything extra will be required of you in exchange for the allowance.

A former boss pushed for a "gas allowance" instead of a raise, and after I accepted he started giving me errands to run "on the way home" after work, or "on the way in." But I was still expected to be in the office during the same hours as before, so it effectively added hours to my work week. Hopefully your boss isn't like that, but just be clear.
posted by Fuzzy Skinner at 7:03 PM on December 22, 2008

Probably as others said, there's a salary cap in your department, but no expense cap. Also, I think the company will save on Social Security & Medicare if what they give you isn't salary. Check with your tax preparer to make sure you don't wind up owing your portion of Soc. Sec. or Medicare.
posted by pmann at 7:17 PM on December 22, 2008

For years I've had friends who worked for small companies, and would get to the point where the company simply couldn't pay them any more. Out of frustration, one year I suggested that they ask if there wasn't anything else they could do. The company took on my friend's car insurance under the guise that they often asked him to run errands in his car. It was like getting a raise in that it was something he didn't have to pay, and apparently there was some tax deduction for them. Another friend got the company to pay her cell phone bill, another her entire cable + internet package, etc.

I imagine this is something similar. None of them were making enough cash for anything to have made an appreciable difference but you should of course discuss with an accountant.
posted by micawber at 8:07 PM on December 22, 2008

A former boss pushed for a "gas allowance" instead of a raise, and after I accepted he started giving me errands to run "on the way home" after work, or "on the way in." But I was still expected to be in the office during the same hours as before, so it effectively added hours to my work week. Hopefully your boss isn't like that, but just be clear.

This is precisely what I imagined when I read the question.

Beware Greeks bearing gifts.

But, assuming my cynicism is unfounded and it's just cash with no strings, then I'd say this is almost certainly a creative-accounting measure to get you the cash your boss thinks you deserve. And, if it's just cash, then it's just income for your taxes. Income tax doesn't care if the money came from salary, hourly billings, poker winnings, drug dealing (there's a line on one of the forms for illegal income, actually), or an "allowance". There is a difference, however, when it comes to an employer covering expenses, and there are a few classes of income that don't count, e.g. cash gifts under ~$10k.
posted by Netzapper at 8:22 PM on December 22, 2008

When academics get perks like this instead of salary during negotiations (hiring, not raises) the reason is that salaries will be subject to cost-of-living raises that are generally in the form of a percentage increase in salary. If they give you more salary now, they're committing not only to that, but to that plus 3% of that next year, plus 4% of 103% of that the year after that, plus 2% of 107% of that the year after that, etc. etc.

If they give you other perks like pots of money for other things, then the pot stays the same size until someone explicitly decides to change it. They can even have the pot expire or be renegotiated or such after some specified period of time. A perk is a one-time expense or at the very least a fixed expense. A salary increase is a lengthy commitment that will continue to grow.

Also, there could be an issue of salary grades. Maybe the raise you asked for would put you in another grade which would mess up their ranking of which jobs are worth more than which jobs.
posted by If only I had a penguin... at 8:40 PM on December 22, 2008 [1 favorite has favorites]

I agree w/ the assessments that it is working around a salary cap and/or merit increase cap.
posted by gnash at 9:04 PM on December 22, 2008

It may be that the per mile rate is controlled by the state or formal policy. If they reimburse you then they cannot legally pay any less. If they dont reimburse you then there might be a chance for you to demand the money via legal action or formal complaint. Especially if a fellow employee reveals how much he gets for his own driving.
posted by damn dirty ape at 9:12 PM on December 22, 2008

Is it possible that the executives above you want a car allowance, but need employee participation to avoid nondiscrimination laws?
posted by pwnguin at 10:28 PM on December 22, 2008

(401ks, for example have regulations requiring employee participation beyond "highly compensated employees", or face limits on tax deferrals)
posted by pwnguin at 10:38 PM on December 22, 2008

It's for taxes. Though it might be taxable income to you, it's not subject to Soc Security/ Medicare tax.
posted by itsamonkeytree at 10:51 PM on December 22, 2008

Yeah, there's no payroll tax (FICA: Social Security + Medicare) on these type of allowances and they are considered a business expense for the company. In general, for every $100 you get paid in gross paycheck, it costs your employer another $7.50 that you never see.
posted by ikkyu2 at 1:24 AM on December 23, 2008

The only fly in this ointment I can see is that you will not be further compensated when you actually use your car for work.
posted by Goofyy at 4:53 AM on December 23, 2008