Most businesses handle employee expense reimbursements every day. This is especially the case if you have a large workforce that has to travel for work or pay for business-related expenses out-of-pocket (e.g., a design team that buys supplies for projects).
State laws outline whether you are responsible for ensuring all employees' work-related expenses are covered. Whether or not they're taxable, how to account for them, and how to process them is where it gets complicated.
What is an employee reimbursement?
A reimbursement is a payment a company makes to cover an employee's out-of-pocket expenses they incurred on the company's behalf. It's normally a one-time payment, and it only happens after the employee has already paid for the expense themselves.
Examples of reimbursements include:
- Travel costs (e.g., plane tickets, rental cars, hotel stays)
- Meal expenses during business trips or company events
- Work equipment or supplies
- Project materials or services
- Home office equipment
- Other work-related expenses (e.g., parking fees, tolls)
Those are the basics (obviously, you're going to pay employees back for what they spent on the company!).
Beyond business expenses, employers sometimes offer various reimbursements as part of their employee benefits package — commuting costs, tuition, and even gym memberships.
Are employee expense reimbursements counted as taxable income?
If these conditions are met, the reimbursements are usually not taxable.
- It's a legitimate business expense (e.g., company-related travel or supplies).
- The employee would be entitled to deduct the cost as an itemized deduction on their taxes (if they paid it themselves).
- The expense was paid under an "accountable plan" (we'll cover that in a minute).
But things can get tricky if you don't have a solid reimbursement policy in place. And some reimbursements have special rules, making them potentially taxable to your employees.
So what's an "accountable plan"?
It's a term the IRS uses to describe a reimbursement or expense allowance arrangement that satisfies all the following three rules:
- The expenses have to be incurred in connection with services performed as an employee.
- Employees must provide substantiation of the expenses within a reasonable period (typically 60 days).
- They must return any excess reimbursement or allowance within a reasonable period (typically 120 days).
Substantiation normally comes in the form of receipts, invoices, or other documentation that proves the expense was incurred and is in line with company policy.
Now...let's dive into different types of employee expense reimbursements and whether or not they're taxable.
Per diem travel allowances
A per diem is a daily allowance meant to cover all your employees' meals, lodging, and incidental travel expenses. Instead of reimbursing employees for their individual meals, travel, and lodging expenses, you can offer them an allowance, the taxability of which is based on the federal government's per diem rates.
Every October, the General Services Administration (GSA) issues an update of these rates. They differ across locations, as well as the time of year (high and low season). If you don't exceed these per diem rates, you won't have to worry about employees reporting the excess as taxable income (the per diem allowances are fully deductible).
Per diems have their own rules for substantiation, but they're easier than tracking every single expense. As an employer, you can gather and track receipts using those figures as their maximum amount.
Meals and entertainment
Taking a client out to lunch or holding a retreat for your top-performing sales team? There's a bit of complexity here, so we'll break it down for you to make things easy.
- Business meals are deductible at 50% on your corporate tax return. However, you can reimburse employees in full.
- Client entertainment is almost always non-deductible — courtside seats to the Lakers game are on entirely on you.
- Since they're necessary to run a successful business with highly engaged employees, benefits like performance trips, retreats, and experiences are almost always partially or fully deductible — that is, if you can prove there were work-related discussions or activities.
Let's say you're flying your team members out for a retreat. They purchase flights, hotel rooms, food, and excursions. With an accurate expense report, you can reimburse them for all those expenses and deduct them.
If someone from your sales team wants to win over a potential new client, though, you can only deduct 50% of the meal's cost, but you should reimburse them for the whole thing.
Reimbursement for medical expenses
You might offer health benefits through a medical expense reimbursement plan (MERP) instead of a group health plan. This is also called a Section 105 plan.
The most common type of MERP is a health reimbursement arrangement (HRA) — a type of employer-funded health benefit that reimburses employees for qualified medical expenses. This includes premiums, deductibles, and copays.
There are four main types of HRAs:
- Qualified small employer HRA (QSEHRA) — This is only for employers with fewer than 50 employees. It's tax-free to employees for expenses that qualify under Publication 502. In 2024, maximum contribution is set at $6,150 for single employee coverage and $12,450 for family coverage.
- Excepted benefit HRA (EBHRA) — If you do have a group health plan, this HRA option offers limited reimbursement for medical expenses not covered by the group plan (e.g., vision and dental). You can contribute up to $2,100 in 2024.
- Individual coverage HRA (ICHRA) — In an ICHRA, you can set different reimbursement amounts for employees based on job classification (e.g., full-time vs. part-time). Each team member can pay for their health plan through ICHRA reimbursements, and there's no contribution limit.
- Group coverage HRA (GCHRA) — This type of HRA allows you to reimburse your employees on a group plan for medical expenses the plan doesn't cover. It's tax-free and makes high-deductible plans more viable for employees.
HRAs are also tax-free as long as the reimbursements are used to pay for qualifying medical expenses. However, since they're employer-sponsored plans, they're subject to ERISA.
ERISA requires employers to provide plan participants with an annual notice, summary plan description, and other disclosures required by the Department of Labor.
Parking reimbursement and commuter benefits
Parking reimbursement and commuter benefits are tax-deductible employee expenses up to a certain amount. Expenses eligible for tax deduction include:
- Parking fees
- Metered or timed street parking
- Parking expenses employees incur during work-related travel
- Parking at a job site away from the regular workplace
According to IRS Publication 15-B (2024), $315 is the monthly exclusion limit. You can cover the cost of parking up to $315 per month tax-free.
Besides parking, you can also reimburse commuting costs associated with work-related travel that involve a car, bus, train, ferry, or vanpool. Mass transit and commuter highway vehicles fall under this category.
In 2024, the monthly exclusion limit for commuter highway vehicles and transit passes is also $315. This is a different $315, and each exclusion limit can only be used for its specific purpose.
Tuition reimbursement
Tuition reimbursement isn't directly related to employee business expenses, but 80% of large companies offer it, as do plenty of small and mid-sized businesses. If you're going to offer it, there are a few things you have to be aware of:
- The non-taxable contribution limit for each employee is $5,250.
- Tuition reimbursement is only non-taxable until December 31, 2025.
- $5,250 is cumulative. If you offer other education benefits (e.g., student loan stipends), this limit applies to all of them.
If the education is a requirement for employment, it's a working condition fringe benefit. These are tax-deductible as ordinary business expenses even after December 2025. An example would be an employee maintaining certification or taking continuing education courses as part of their job.
Cell phone reimbursements
In some states, like California, cell phone reimbursement is required. But even if it's not, offering cell phone reimbursement can be a great perk that doesn't come with much overhead.
You can offer a cell phone reimbursement stipend, which is a fixed amount you pay each month to employees who use their personal phones for work. Alternatively, you can reimburse actual expenses.
Either way, the whole reimbursement is non-taxable as long as employees use their cell phones for work purposes (e.g., calls, sending emails).
Stipend reimbursements
Stipends and reimbursements are fundamentally different. But they don't have to be mutually exclusive.
With Compt, there are several categories of reimbursable expenses you can pay out as stipends. There are three primary benefits to this model (which we call 'stipend reimbursements').
- The 'reimbursement' element means you won't have to front the funds.
- You also won't find yourself paying for unused benefits.
- The 'stipend' aspect means your team has control over where and how they spend their stipend, making it more personalized and effective.
Let's look more closely at a few perks (aka lifestyle benefit) categories you might want to offer as stipend reimbursements.
Health and wellness
Health and wellness stipends give your team members the freedom to choose which health-related expenses they want to prioritize. Some possible inclusions are:
- Fitness reimbursement (memberships, classes, etc.)
- Exercise equipment purchases
- Sports league fees
- Health coaching services and programs
- Meditation apps
- Fitness trackers
If a gym membership helps someone stay healthy and productive on the job (and trust is, it does), it's a win-win.
Learning and development
Learning and development stipends are tax-deductible. Include expenses for:
- Books and ebooks
- Online courses (e.g., Udemy)
- Conferences and workshops
- Certifications and exams
Keep in mind that if the learning materials aren't specifically related to job duties, this is a benefit you may need to pay taxes on. For example, reimbursement for a course or certification that doesn't apply to their current role or profession falls outside the definition of a business expense.
Remote work
As we mentioned above, there are a few states that actually require you to cover remote work costs for your employees. Even if you aren't required, a remote work stipend is one of the best ways to support your team while keeping expenses manageable.
- Laptops and chargers
- Desks
- Ergonomic chairs
- Headphones
- Monitors
- Microphones
- Video cameras
- Standing desks or treadmill desks
These are just some of the things you can reimburse with a remote work stipend setup instead of giving everyone a fixed monthly amount.
Keep in mind this category has taxable and non-taxable items. The stipends themselves are taxable. A business-related expense reimbursement like a laptop or monitor is tax-deductible, however.
That's why it's best to reimburse them separately and give a general remote work stipend for small, miscellaneous items. This way, it's clear which expenses are specifically for work purposes.
Why you should offer employee reimbursements
Using reimbursements as the mechanism for providing employee benefits offers several advantages for both employees and employers:
- Cost Control: Employers can control costs more effectively with reimbursement programs by only paying for expenses that are actually incurred by employees. This helps prevent overspending on the company's behalf because they're only paying for the purchases employees actually make and then claim. If cost is a big factor to your lifestyle benefits program, then reimbursements are your best approach.
- Flexibility: Reimbursements allow employees to choose the specific products or services that best meet their needs. Because employees are being reimbursed, it allows them to purchase from a diverse set of vendors employees ensuring employees get access to benefits that are most desireable to them.
- Fairness: Reimbursements promote fairness by reimbursing employees for actual expenses incurred rather than providing a one-size-fits-all benefit like dependent-care benefits, tuition reimbursement, or a specific wellness app. With reimbursements, employees receive stipends that they can spend on their individual needs.
Compliance: Reimbursement programs help ensure compliance with tax regulations and labor laws. By reimbursing employees for eligible expenses, employers can avoid potential tax penalties and legal risks associated with non-compliance.
Transparency: Reimbursement programs provide transparency by clearly outlining the expenses that are eligible for reimbursement and the process for submitting reimbursement requests. This transparency helps employees understand their benefits and reduces confusion or ambiguity.
Encourages Responsible Spending: Reimbursements encourage responsible spending behavior among employees, as they are responsible for initially covering the cost of eligible expenses. This promotes mindful decision-making and discourages frivolous or unnecessary spending.
Alignment with Corporate Culture: Reimbursement programs can be tailored to align with the values and objectives of the organization. For example, offering reimbursements for health and wellness expenses reflects a commitment to employee well-being, while reimbursing professional development expenses demonstrates a commitment to employee growth and career advancement.
Employee Empowerment: Reimbursement programs empower employees to take control of their benefits and make choices that align with their individual needs and priorities. This fosters a sense of autonomy and ownership over their benefits, which can lead to greater satisfaction and engagement.
Scalability: Reimbursement programs are scalable and can be easily adjusted to accommodate changes in employee needs, company growth, or shifts in business priorities. This scalability makes reimbursement programs adaptable to evolving circumstances and ensures that benefits remain relevant and effective over time.
Competitive Advantage: Offering reimbursement programs as part of the benefits package can give employers a competitive advantage in attracting and retaining top talent. Reimbursements demonstrate a commitment to employee well-being and development, which can differentiate the employer from competitors and enhance its reputation as an employer of choice.
Overall, using reimbursements as the mechanism for providing employee benefits offers numerous advantages in terms of flexibility, fairness, cost control, compliance, transparency, and employee empowerment. By implementing reimbursement programs strategically, employers can enhance employee satisfaction, improve retention, and gain a competitive edge in the talent market.
Setting up your expense reimbursement policy
On the whole, reimbursing employee expenses is a win-win for employers and employees. It's cost-effective and adds value to compensation packages, making them more competitive.
To set up your policy:
- Define which expenses you'll reimburse (and at what rate) in writing.
- Share the policy with all your employees (ideally as part of an onboarding guide or handbook).
- Track expenses for compliance and budgeting purposes.
- Reimburse according to a consistent schedule, such as weekly or monthly.
- Maintain clear communication with employees regarding reimbursement procedures and any changes to the policy.
With Compt, ensure 100% tax-compliant employee reimbursements
We're not sure why you'd even think of managing employee reimbursements manually in 2024.
But if you are, let us be the ones to tell you: DON'T. Just don't.
With Compt, the process is simple as can be. Set up stipend and reimbursement categories, assign amounts, and have employees submit expenses for approval.
Once approved, the reimbursements are automatically included in payroll (we integrate with your payroll software). Employees will see it on their next paycheck.
The platform will auto-create expense reports, too. This way, you have a record of all expenses that require reimbursement for tax purposes. And your accounting and finance teams will have everything they need for budgeting and compliance.
Request a demo to see how it works.