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 has set the standard mileage rate for 2025 at $0.66 per mile, reflecting inflation adjustments.
- Health Insurance: Companies may reimburse health insurance premiums, including the employer's share of COBRA contributions, up to $50,000 in group life insurance, health, and accident coverage.
- Tuition: Employers can offer educational assistance up to $5,250 annually. Amounts within this limit are not part of taxable income.
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.
- After ensuring it complies with the company's reimbursement policy, the manager reviews and signs the expense report.
- Approved expenses are recorded in the company's accounting system for record-keeping purposes.
- The employee receives reimbursement through direct deposit, check, or other means.
- Companies use expense reports to identify areas for improvement in their reimbursement processes.
Company Policy and IRS Guidelines
The tax treatment of business expense reimbursements depends on the company's reimbursement policy and IRS guidelines. Employers must report certain reimbursements on employees' W-2 forms unless they are part of an accountable plan.
Accountable Plans
An accountable plan requires employees to:
- Report their business expenses within a reasonable time (usually within 60 days).
- Refund excess reimbursement within a reasonable time (typically 120 days).
Advances toward reimbursement must occur within 30 days of the expense.
Non-Accountable Plans
A non-accountable plan does not meet the requirements of an accountable plan. Expenses under such a plan are treated as supplemental wages and are taxable.
Taxable Reimbursements
Some taxable reimbursable business expenses include:
- The personal use of a company vehicle
- The value of company-provided services, such as legal or accounting services
- Prizes or awards received for goods or services
Non-Taxable Reimbursements
Some reimbursements are non-taxable and subject to policy guidelines:
- Expenses conforming to IRS reimbursement guidelines
- Insurance premiums, including employer-paid COBRA contributions, up to $50,000 for group life insurance
- Annual educational reimbursements up to $5,250
- Discounts up to 20% on employer-supplied goods and services
- Transport-related benefits, including transit passes and parking, up to $325 per month
- Meals and lodging are available for employer convenience
- Retirement plan services offered as part of a qualified plan
Tax-Deductible Employee Expenses
Some job-related expenses may qualify for tax write-offs regardless of reimbursement, such as:
- Uniforms: The cost of maintaining required uniforms is considered a business expense.
- Tools and Equipment: Employees who purchase work-related tools and equipment may claim these expenses.
Takeaway
A successful expense reimbursement policy must include a documented plan that defines reimbursable expenses and repayment methods. Keeping current with IRS guidelines and inflation-adjusted limits ensures that both employers and employees maximize tax benefits while maintaining compliance.