Types of employee reimbursements and which are taxable

What are employee reimbursements?

Employee reimbursements are payments made by an employer to their employees to compensate them for any work-related expenses they paid out-of-pocket.

According to the IRS, examples of reimbursable employee business expenses include:

• Business travel expenses
• Meals with clients
• Equipment purchases
• Office supplies
• Items necessary for the employee to do their job

‍Typically, business owners will provide employees with an allowance or set a maximum amount they can spend on these items. The employee must then track their expenses and submit expense reports for reimbursement at the end of a certain period, usually the end of the month or quarter.

Employers are typically obligated to reimburse any legitimate business-related expense that's in line with their company's policies, so companies must set clear rules and guidelines to ensure costs are kept in check.

Types of employee reimbursements

Here’s a list of the various types of employee expense reimbursements, along with information about their taxability:

Travel and mileage reimbursement

Travel and mileage reimbursement covers the costs associated with employee travel, including transportation, lodging, and meals. Unlike other forms of reimbursement, travel and mileage have unique aspects, primarily due to the variable nature of travel expenses and the need for specific calculations like mileage. It’s not simply a matter of employees turning in their credit card receipts.

Standard mileage rates

A common method for reimbursing employees for the use of their personal vehicles for business purposes involves using a standard mileage rate. This rate, set annually in the IRS Publication 463, aims to cover fuel costs and wear and tear on the vehicle. It simplifies the reimbursement process by providing a clear, per-mile rate that applies to all eligible employees. Note that vehicle coverage doesn’t typically cover regular commuting.

Per diem allowances for travel

For travel-related expenses such as lodging and meals, employers may opt for a per diem allowance. This fixed daily amount is intended to cover the costs of meals and accommodations while traveling for work. The per diem rates, which can vary by location and time of year, offer a straightforward approach to managing travel expenses without the need for detailed expense tracking.

Health stipends

Health stipends reimburse employees for medical expenditures. These health benefit stipends work similarly to Health Reimbursement Arrangements (HRAs), but they’re tax-deductible.

Health stipends are a good option for businesses that want to give employees extra money to supplement health benefits not fully covered in their health insurance plan.

The types of expenses that can be covered in a healthcare stipend include:

• Health insurance premiums
• Prescriptions
• Medical expenses employees pay with their own money

Employee stipends

Employee stipends allow businesses to enrich their benefits packages and increase their appeal as employers. These fringe benefits are designed to offer employees a monthly or annual budget for various expenses, letting them tailor their benefits to their specific needs. By aligning benefits with personal preferences and life circumstances, this flexibility can greatly enhance job satisfaction in ways that extend beyond an employee’s wages.

Health stipends

Health stipends provide a taxable benefit to employees for covering medical-related expenses. Unlike HRAs, health stipends come with fewer restrictions and can be applied to a broader range of health costs.

Health stipends can cover expenses such as:

• Health insurance premiums
• Prescription medications
• Dental and vision care
• Mental health services
• Wellness apps and gym memberships

Wellness stipends

Wellness stipends aim to support the overall well-being of employees by reimbursing expenses related to physical and mental health activities that aren't strictly medical.

This type of stipend recognizes the broad spectrum of wellness, including activities and resources that contribute to an employee's health outside of traditional healthcare.

Examples of reimbursable wellness expenses include:

• Memberships for gyms or fitness centers
• Enrollment in fitness or yoga classes
• Purchases of home exercise equipment
• Subscriptions to meditation or wellness apps
• Wearable fitness trackers

Home office stipends

Home office or remote work stipends are designed to support employees in creating and maintaining a productive home office environment, covering a range of expenses to facilitate remote work.

These stipends, which are tax-deductible, can be used for:

• Monitors and other computer hardware
• Office furniture purchases
• Internet service fees
• Phone bills
• Software subscriptions

Professional development stipends

Professional development stipends are allocated to employees for the purpose of furthering their education, skills, and career growth. This benefit supports a range of professional development activities, providing employees with the financial resources to pursue opportunities that enhance their job performance and career trajectory.

Eligible expenses under professional development stipends typically include:

• Tuition for courses or workshops
• Fees for certification exams
• Purchase of textbooks and educational materials
• Attendance at conferences and seminars

Which employee reimbursements are taxable?

The taxability of employee reimbursements depends on whether the expense is considered a business expense by the IRS and what kind of expense reimbursement plan you use: namely, an accountable or non-accountable plan.

An "accountable plan" is a reimbursement arrangement that meets certain IRS requirements. With an accountable plan, employers can reimburse employees for business-related expenses without having to report them as taxable income.

Under an accountable plan, there must be a business connection between the expense and the employee's job duties. To be considered an accountable plan, you must also require your employees to submit adequate documentation and a "statement of business purpose" that defines the connection between the expense and the employee's job.

By contrast, a "non-accountable plan" doesn't meet the requirements of an accountable plan. In this case, all business expense reimbursements are taxable and should be reported as wages. That means you must withhold payroll taxes on any non-accountable reimbursements, and employees must report them as income when filing their taxes.

Understanding the 30/60 rule

The 30/60 Rule requires employees to submit reimbursement requests within 30 days of incurring expenses. If you fail to reimburse an employee within 60 days, the amount will appear on their W-2, and they'll be responsible for paying the taxes.

Employees may claim unreimbursed business expenses as deductions on their income tax returns, but they must include them in their gross income first. These expenses shouldn't exceed 2% of the employee's adjusted gross income, so it's essential to keep accurate records and documentation to claim them.

Maximizing Reimbursement Tax Benefits

Maximizing reimbursement-related tax benefits involves strategically planning to ensure that your reimbursement policies align with tax laws to minimize tax liabilities. Here are several strategies companies can use:

1. Implement accountable plans: Design an accountable plan that complies with IRS rules. Reimbursements made under such plans are not taxable to the employee and are deductible by the employer.
2. Optimize tax-free fringe benefits: Offer fringe benefits that are exempt from federal income tax and often from FICA taxes, such as health insurance, retirement planning services, and educational assistance.
3. Provide health savings accounts (HSAs) and Flexible Spending Accounts (FSAs): HSAs and FSAs allow employees to use pre-tax dollars for medical expenses, reducing taxable income for both the employee and the employer.
4. Leverage retirement plans: Contributions to employee retirement plans (like 401(k)s) are typically pre-tax, reducing the taxable income of employees and lowering the employer's payroll taxes.
5. Technology and home office support: With more employees working remotely, companies can provide technology support (like computers, software, and internet access) as tax-free benefits.

When in doubt, it’s best to work with a tax advisor to maximize your reimbursement-related tax benefits, and to ensure your policies are structured in the most tax-efficient way possible.

Ramp makes expense reimbursements faster

Ramp's corporate cards eliminate the need for most reimbursements by empowering employees to spend using pre-approved funds. But when out-of-pocket payments do come up, Ramp makes those easy too.

Our expense management software streamlines the entire expense reimbursement process, from submitting expenses to approving payments.

Ramp allows you to automate your expense reimbursement policy with tools to remind employees to submit their expenses on time. Our real-time reporting allows both small businesses and larger enterprises to track spending easily and keep accurate financial records.