October 16, 2024

Are employee reimbursements taxable?

Correctly calculating your business tax liability can reduce your tax burden and help increase profitability. To do that, you need to accurately record all your business expenses and determine whether any expense reimbursements count as taxable income for your employees.

In this post, we’ll define employee reimbursements and list some common reimbursable business expenses. We’ll also cover the IRS rules around when employee reimbursements are taxable vs. non-taxable. Let’s get into it.

What are employee expense reimbursements?

The IRS lays out a clear definition of what an employee reimbursement is. To paraphrase, an expense reimbursement is when an employer reimburses employees for properly substantiated business expenses they paid for out of pocket.

For the expenses to be “properly substantiated,” the employee must (promptly) submit an expense report with supporting documentation, such as receipts. When your business complies with IRS requirements, the employee receives a non-taxable reimbursement.

Common types of reimbursable expenses

Employees often submit reimbursement requests for business-related expenses like:

  • Business travel expenses
  • Meals and entertainment
  • Office supplies
  • Tools and equipment
  • Personal development and training
  • Using a personal vehicle for business purposes

The tax rules regarding deductions for meals and entertainment have changed several times in recent years, so it’s especially important to keep a close eye on these charges. Currently, some meal and entertainment expenses are tax-deductible.

Are reimbursements taxable?

Whether employee reimbursements are taxable depends on how your business manages its reimbursement plan.

In a nutshell, reimbursements paid through an accountable plan are not considered taxable income for the employee, while payments made using a non-accountable plan are considered taxable income. Let’s break down the difference between accountable and non-accountable plans and the requirements you need to meet for each.

Using an accountable plan

To be an accountable plan, your company’s reimbursement policy or allowance arrangement must follow these rules:

  1. Your expenses must have a business connection—that is, the employee must have paid or incurred deductible expenses while performing their job
  2. Employees must adequately report these expenses within a reasonable period of time
  3. Employees must return any excess reimbursement or allowance within a reasonable period of time

Document your accountable plan and ensure your entire staff can quickly access plan details. A comprehensive and clearly written document reduces confusion about the plan and will speed up the reimbursement process.

What is a “reasonable period of time”?

The so-called 30/60 rule clarifies the IRS requirement to report expenses within a reasonable period of time. What qualifies as a “reasonable period of time” depends on the unique circumstances of your situation, but the IRS provides some general guidelines.

To illustrate these guidelines, let’s assume you’re a salesperson who travels frequently to see customers:

  • You receive a cash advance within 30 days of the time you incur an expense
  • You adequately account for your expenses within 60 days after they were incurred
  • You return any excess reimbursement within 120 days after the expense was paid
  • You’re given a periodic statement (at least quarterly) that asks you to either return or adequately account for excess advances, and you comply within 120 days of the statement

If you meet these rules for accountable plans, employee expense reimbursements aren’t subject to income tax.

Using a non-accountable plan

Reimbursements made under a non-accountable plan don’t comply with the accountable plan rules. In addition, even if you have an accountable plan, the following payments will be treated as being paid under a non-accountable plan:

An arrangement that repays employees for business expenses by reducing wages, salary, or other pay is treated as a non-accountable plan. This is because employees are entitled to receive their total pay regardless of whether they’ve incurred any business expenses on your company’s behalf.

As such, these types of employee reimbursements are subject to tax withholding, and the payment is added to the employee’s taxable income.

Your relationship with your employees is valuable. It’s important that you understand when an employee reimbursement is taxable and communicate your reimbursement policy to your staff. This will help you maintain good relationships with your employees.

Can employees deduct unreimbursed business expenses?

The Tax Cuts and Jobs Act (TCJA) of 2017 suspended many miscellaneous itemized deductions starting in 2018. That means most employees can no longer write off unreimbursed business expenses on their tax returns—at least until many provisions of the TCJA sunset at the end of 2025.

With that said, there are some special exceptions to these rules. The following individuals can deduct unreimbursed business expenses in certain circumstances:

  • Armed forces reservists
  • Qualified performing artists
  • Fee-based public officials
  • Disabled employees with impairment-related work expenses
  • Teachers

Be sure to review what types of unreimbursed business expenses are deductible and under which circumstances. When in doubt, it’s best to consult a tax professional.

Other types of employee business expenses

You may need to manage several other types of expenses, each of which has its own tax considerations:

Per diem reimbursements

The IRS defines a per diem allowance as a fixed amount of daily reimbursement an employer gives an employee for lodging, meals, and incidental expenses when the worker is away from home on business.

Many businesses use the per diem rates determined by the General Services Administration (GSA) to budget for travel. Per diem payments aren’t subject to taxes provided they stay below the GSA’s prescribed per diem rate. Of course, your company doesn’t have to use these per diem rates, but many businesses rely on them as a benchmark.

Moving expenses

The TCJA requires employers to include moving expense reimbursements in employees’ wages. As such, these reimbursements are subject to income and employment taxes—at least until the law sunsets in 2025. Generally, members of the US Armed Forces can still exclude qualified moving expense reimbursements from their income.

Fringe benefit payments

The tax code defines a fringe benefit as a form of pay for the performance of services. For example, when you allow employees to use a business vehicle to commute to and from work, you provide a fringe benefit.

A taxable fringe benefit must be included in the employee's pay unless the law excludes it. IRS Publication 15-B lists some exceptions to the rule, including:

  • Accident and health benefits
  • Dependent care assistance
  • Educational assistance
  • Employee discounts
  • Retirement planning services
  • Commuting benefits
  • Tuition reduction

Maintain solid employee relationships by communicating fringe benefit details to your staff. Explain the fringe benefits you provide and whether or not the fringe benefit generates taxable income for the employee.

Simplify expense management and reimbursements with Ramp

Employee reimbursements can be one of the trickiest elements of small business taxes. Ramp’s expense management platform can help you get it right.

Ramp unifies all your corporate spending data in one place. Our software automatically categorizes business expenses so you always have a clear and accurate view of which expenses are deductible and which aren’t. Ramp can even automate your expense reporting and approval workflow, helping you reimburse employees faster with less manual work.

Want to learn more? Watch a demo video and see why businesses that choose Ramp save an average of 5% a year.

Try Ramp for free
Share with
Ken BoydAccounting and finance expert
Ken Boyd is a former CPA, accounting professor, writer, and editor. He has written four books on accounting topics, including The CPA Exam for Dummies. Ken has filmed video content on accounting topics for LinkedIn Learning, O’Reilly Media, Dummies.com, and creativeLIVE. He has written for Investopedia, QuickBooks, and a number of other publications. Boyd has written test questions for the Auditing test of the CPA exam, and spent three years on the Audit staff of KPMG.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

When our teams need something, they usually need it right away. The more time we can save doing all those tedious tasks, the more time we can dedicate to supporting our student-athletes.

Sarah Harris

Secretary, The University of Tennessee Athletics Foundation, Inc.

How Tennessee built a championship-caliber back office with Ramp

Ramp had everything we were looking for, and even things we weren't looking for. The policy aspects, that's something I never even dreamed of that a purchasing card program could handle.

Doug Volesky

Director of Finance, City of Mount Vernon

City of Mount Vernon addresses budget constraints by blocking non-compliant spend, earning cash back with Ramp

Switching from Brex to Ramp wasn’t just a platform swap—it was a strategic upgrade that aligned with our mission to be agile, efficient, and financially savvy.

Lily Liu

CEO, Piñata

How Piñata halved its finance team’s workload after moving from Brex to Ramp

With Ramp, everything lives in one place. You can click into a vendor and see every transaction, invoice, and contract. That didn’t exist in Zip. It’s made approvals much faster because decision-makers aren’t chasing down information—they have it all at their fingertips.

Ryan Williams

Manager, Contract and Vendor Management, Advisor360°

How Advisor360° cut their intake-to-pay cycle by 50%

The ability to create flexible parameters, such as allowing bookings up to 25% above market rate, has been really good for us. Plus, having all the information within the same platform is really valuable.

Caroline Hill

Assistant Controller, Sana Benefits

How Sana Benefits improved control over T&E spend with Ramp Travel

More vendors are allowing for discounts now, because they’re seeing the quick payment. That started with Ramp—getting everyone paid on time. We’ll get a 1-2% discount for paying early. That doesn’t sound like a lot, but when you’re dealing with hundreds of millions of dollars, it does add up.

James Hardy

CFO, SAM Construction Group

How SAM Construction Group LLC gained visibility and supported scale with Ramp Procurement

We’ve simplified our workflows while improving accuracy, and we are faster in closing with the help of automation. We could not have achieved this without the solutions Ramp brought to the table.

Kaustubh Khandelwal

VP of Finance, Poshmark

How Poshmark exceeded its free cash flow goals with Ramp

I was shocked at how easy it was to set up Ramp and get our end users to adopt it. Our prior procurement platform took six months to implement, and it was a lot of labor. Ramp was so easy it was almost scary.

Michael Natsch

Procurement Manager, AIRCO

“Here to stay:” How AIRCO consolidated procurement, AP, and spend to gain control with Ramp