Employers commonly reimburse employees for job-related expenses through an expense reimbursement policy. This policy typically covers:
- Business travel expenses
- Meals and entertainment expenses
- Business use of the employee's vehicle
- Purchases of tools and supplies by employees
- Expenses incurred for educational and professional purposes
Instead of reimbursing each business expense individually, companies can establish a reimbursement policy that specifies which costs are eligible for reimbursement and the process for receiving funds.
According to the Fair Labor Standards Act (FLSA), employers must reimburse employees for all unavoidable job-related expenses. If these expenses reduce an employee's pay below the federal minimum wage, employers must increase the employee's wages to cover the costs.
Types of Reimbursable Expenses
While employers have discretion in choosing which business expenses to reimburse, there are some typical expenses they often consider:
- Travel: Employers reimburse employees for meals, lodging, transportation, and other necessary expenses while traveling for business.
- Gas: Companies reimburse employees for gas when they use their vehicles for business travel, also known as mileage reimbursement. The IRS sets a standard mileage rate every year, which companies can use as a guide to set their gas reimbursement limits.
- Health Insurance: Companies may reimburse health insurance premiums as a benefit to attract and retain top talent and make health insurance more affordable.
- Tuition: Organizations can offer tuition reimbursement to employees who pursue further education or improve their skills.
Non-Reimbursable Expenses
Some expenses are not reimbursable under most company policies, such as:
- Personal expenses, like clothing, unless required for the job
- Meals and entertainment expenses that are not directly job-related
- Expenses for gas and transportation that are not business-related
- Relocation costs, like housing and storage, unless previously agreed upon by the employer
Reimbursement Process
An expense reimbursement process typically includes the following steps:
- The employee incurs business expenses and prepares and submits an expense report to the company.
- The manager reviews and signs the expense report after ensuring it is valid and complies with the company's reimbursement policy.
- The accounting system records any approved expenses for record-keeping purposes.
- The employee receives reimbursement through direct deposit, check, or other means.
- The company uses expense reports to identify areas for improvement in its expense reimbursement process.
Company Policy and IRS Guidelines
The tax treatment of business expense reimbursement depends on the company's reimbursement policy and IRS guidelines. Employers must report certain reimbursements on the employee's W-2 form.
Accountable Plans
An accountable plan requires employees to report their business expenses within a reasonable time, usually within 60 days of the expense date. The plan also outlines how to refund excess funds to the company within a reasonable period, typically within 120 days of the expense date.
Advances toward reimbursement must occur within 30 days of the expense.
Non-Accountable Plans
A non-accountable reimbursement plan does not meet the requirements of an accountable plan. Expenses incurred under such a plan are considered supplemental wages and are taxable.
A non-accountable plan disqualifies:
- Employees who fail to submit or justify their expenses within the set time
- Employees who do not return excess reimbursement within agreed deadlines
Taxable Reimbursements
Some taxable reimbursable business expenses for employees include:
- Using a company vehicle for work purposes
- Company-provided services, like legal advice or accounting, whose value is reported as salary or wages
- Prizes for goods or services that employees must report as part of their income
Non-Taxable Reimbursements
Some reimbursements are non-taxable and subject to policy guidelines, such as:
- Expenses that conform to IRS expense reimbursement guidelines
- Insurance premiums, including the employer's share of COBRA contributions, up to $50,000 in group life insurance, health, and accident coverage
- Annual educational reimbursements up to a maximum of $5,250
- Discounts of up to 20% on employer-supplied goods and services
- Transport-related benefits, like transit passes and free parking up to $280 per month
- Workplace meals and lodging subject to company guidelines
- Retirement plan services as part of a qualified plan
- Using company vehicles for commuting, subject to specific guidelines
Tax-Deductible Employee Expenses
Some job-related expenses can be eligible for tax write-offs regardless of reimbursement, such as:
- Uniforms: Where employees are required to wear a uniform, the cost of maintaining such a uniform is considered a business expense of the employer.
- Tools and Equipment: Employees required to purchase work-related tools and equipment can transfer the expense to their employers for reimbursement.
Takeaway
A successful expense reimbursement policy must have a documented plan that defines reimbursable expenses and repayment methods. A well-designed policy can also maximize the employer and employee's tax benefits.