Employee Expense Reimbursement 101: What You Need to Know

The expense reimbursement process enables an employer to pay funds back to an employee for business-related expenses they paid for with their own money. It is also an opportunity to create a policy that outlines procedures and sets clear expectations. 

A good expense reimbursement policy clarifies which expenses are and are not covered and explains how the employee may go about requesting reimbursement and what documentation, such as receipts, they will need. 

Additionally, a well-crafted policy can maximize tax benefits for both parties, the employer and the employee. 

The Fair Labor Standards Act does not make employee expense reimbursement mandatory (although it does forbid an employee’s expenses to bring their wages lower than the applicable minimum wage or eat into their overtime wages). Nevertheless, it is considered customary and is common practice for businesses to cover certain expenses. 

What should businesses cover?

To put it simply, employers should cover expenses necessary to the operation of the business or the employee’s ability to complete the duties and responsibilities of their job. However, what exactly that means for a given business specifically is open to interpretation. 

For example, if an employee’s job requires travel, the employer may cover meals and lodging. Even entertainment expenses meet the criteria defined by IRS Publication 463 if these purchases can be shown to have a clear business purpose.  

Gasoline and auto mileage costs related to using a personal vehicle to travel for work are often reimbursable, as are business phone calls. Some additional examples include:

• Office expenses (copy and print services, etc.)
• Conference and registration fees
• Currency conversion fees
• Public transportation
• Laundry, dry-cleaning, suit-pressing during business trips longer than five days
• Overnight delivery
• Parking and tolls
• Car rentals
• Visa/passport fees

On the other hand, some examples of expenses your employer will most likely refuse to reimburse include:

• Auto repairs
• Baby-sitters
• Baggage insurance
• Barbers or hairdressers
• Car wash
• Clothing or toiletries
• Decorations for the office
• Golf fees
• In-flight headsets
• Laundry services during business trips shorter than five days
• Loss or theft of cash, property, baggage, or briefcases
• Personal reading materials
• Medical expenses
• In-flight entertainment
• Mini-bar alcoholic refreshments
• Parking tickets, fines, traffic violations
• Spa services

Are reimbursements taxable for the employee?

Generally speaking, employees are not required to report reimbursements as income or wages and therefore are not taxable. Nevertheless, there are some exceptions. 

For example, if your employer provides you with a company car, but you use it for personal reasons, some of the costs may be taxable to you. Additionally, if you receive prizes in the form of goods or services, you must report them with your income at fair market value (FMV). 

On the other hand, many categories of reimbursable expenses are nontaxable for the employee provided specific requirements are met. These include: 

• Educational reimbursements (up to $5,250/year)
• Specific insurance premiums
• Gifts with a minimal value or awards such as plaques and trophies
• Meals or lodging on the worksite
• Use of a company van for commuting
• Additionally, up to $265 per month in transportation-related fringe benefits (like parking, vanpooling, or transit passes)

It’s worth noting that many of the above categories do come with specific guidelines that determine their taxability. It’s never a good idea to assume an expense reimbursement is nontaxable without consulting resources or experts. 

Can expenses be reimbursed through payroll?

While the IRS does allow employers to reimburse employee expenses through payroll, some tax implications can come with doing it this way. For example, if the reimbursement is not made as part of an accountable plan, it will be taxable to the employee as wages. 

In fact, any reimbursement payments made to an employee that are not under an accountable plan are taxable to the employee and subject to withholding.

This brings me to the next question…