What Is Employee Expense Reimbursement? All You Need to Know

Regardless of the size of the company, everyone incurs expenses and costs. These may lower the company’s taxable income. However, there are times when employees incur their own business expenses.

Any time you have employee business expenses, expense reimbursement factors in. States like Illinois and California mandate employers reimburse employees for reasonable job-related expenses.

Therefore, we want to ensure that you know of and comply with the laws in the state where your employees work.

Here’s What We’ll Cover:

What Is Employee Expense Reimbursement?

Examples of Expenses

Key Takeaways

What Is Employee Expense Reimbursement?

Expense reimbursement lets employers reimburse workers who use their own assets. But only when paying toward any work-related expense. Employees receiving expense reimbursement usually don’t have to report income or wages.

These reimbursable costs often occur anytime employees are on business trips. But they may relate to other tasks and job duties. This can include things like the sale of certain job-related tools or supplies.

Most companies reimburse these kinds of expenses. But, should they pay income taxes to their employees for reimbursement of corporate expenses?

According to the IRS, you must have an accountable plan. In doing so, expense reimbursements aren’t part of the employee’s salary.

Understanding an Accountable Plan?

Accountable plans are programs for reimbursable expenses or allowances for job-related expenses. But, these expenses are not included in income and do not need withholding.

Although not a rule of the IRS, such plans can help you establish the criteria for compliance. That is, which business expense reimbursements you can deduct from. Also, which ones go toward taxable income.

Accountable plans for actual expenses help workers avoid taxation on their employer reimbursements.

Accountable Plan Conditions

Want to establish an accountable expense plan? You must have a policy about expense reimbursement. Having an employee expense reimbursement policy will help you stay on track. Or, you must have an advance payment plan that meets the following criteria:

Business Connection: Expenses for reimbursement must be incurred when providing services on duty.

Evidence of Expenses: Also known as substantiation. Here, the employee needs to be able to prove their business expenses. They do so by providing evidence of the expense amount, location, time, and purpose to the employer. Employees must also submit their business expenses in a reasonable time.

Refund of Excess Amount: The worker must repay excess reimbursements to their employer. And they must do so in a reasonable amount of time. These employer-paid reimbursements exceed the amount spent by the worker.

Examples of Expenses

Employers may at times pay reimbursable expenses under the accountable plan. Such expenses don’t go toward the employee’s salary or income. Normally, the employer can deduct these reimbursements, albeit with limitations.

So, which expenses are deductible? According to the IRS, the business expenses must be both necessary and ordinary. Ordinary expenses are generally accepted expenses in your particular industry.

Necessary expenses are for your trade or business. They don’t have to be helpful and appropriate expenses to serve as necessary.

Let’s look at a few examples of these types of expenses that need to be reimbursed by the employer. Common examples are job-related supplies, meals, travel, and entertainment.

Travel Expense: Job-related types of expenses, including:

• Lodging expenses
• Mileage expenses
• Entertainment
• Per diem rate

Anything that meets the conditions listed in the IRS’s Publication No. 463 is usually a reimbursable business expense.

Many employers use a standard mileage rate to repay employees using personal vehicles. Of course, only when conducting business. As such, this does not include expenses for commuting, such as between the worker’s home and job.

Supplies: Supplies purchased by employees for commercial purposes get reimbursed at cost. A good example of this is office supplies. Such office expenses must be reimbursed according to the company’s accountable plan.

Moreover, the worker must provide proof of the expense. And they must provide their expense report in a reasonable period of time.

Key Takeaways

Whether you are an employee or employer, it’s vital to know how expense reimbursement works. In doing so, you can be sure to either get paid or pay out the proper funds. Just make sure you keep a log of expense reports.

We recommend FreshBooks, which makes expense tracking easy. For more tips on business expenses and more, don’t forget to check out our Resource Hub.

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