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As a general rule - a monthly Car Allowance is treated as fringe benefit and should be included into your wages for purposes of income and FICA taxes.
There is an option not to include these payments into your taxable wages if your employer pay reimbursements for business expenses.
To do so - they should establish an accountable reimbursement plan - means each employee reports in timely manner (for instance monthly) all his/her business transportation expenses including (1) date of travel; business purpose (3) number of business related miles driven.
Reimbursements might be up to allowed standard mileage rate - see here - http://www.irs.gov/taxpros/article/0,,id=156624,00.htmlJanuary 1 - June 30, 2011 - 51 cents per mileJuly 1 - December 31, 2011 - 55.5 cents per mile
The employer could deduct ordinary and necessary transportation expenses paid or incurred in its trade or business.
Let me know if you need any help.