Eventually, almost all employers will need to provide reimbursement to an employee for a business expense. Employers need to know how to handle these reimbursements. One compliance challenge is whether or not a business needs to withhold proper payroll taxes on the expense. Let’s answer the question, are expense reimbursements taxable?
What is an expense reimbursement?
There are many instances where an employee would pay for something that they would request reimbursement for. Some of examples of these items are:
- Office supplies
- Business travel and lodging
- Meals and entertainment
- Business use of a personal vehicle
- Tools and uniforms
- Education and training expenses
- Wellness stipends
It is important for even the smallest businesses to have an expense management policy in place to reduce fraud and improve revenue. Outlining an expense policy in the company handbook is key. The policy should detail things such as what items can employees be reimbursed for and the steps they need to take to receive that reimbursement.
Are expense reimbursements taxable?
According to IRS reporting requirements, some business expenses are classified as taxable and others are considered non-taxable. Generally, businesses categorize expenses into two categories in order to separate taxable expenses from non-taxable expenses. These categories are:
- Accountable plan expenses
- Non-accountable plan expenses
Accountable plan expenses
Expenses reimbursed under an accountable plan generally are non-taxable. These expenses are often considered “business necessities”. Included in non-taxable business expenses are:
- Office Supplies
- Education & Training
- Mileage & Tolls
- Business Meals
- Business Travel
- Miscellaneous Business Expenses
- Required Tools & Uniforms
- Student Loan/Educational Reimbursement (under a Section 127 plan – up to $5250 per year)
- Parking Stipends (up to $280/month under a qualified plan)
- Cell Phone Stipend (for business related use)
Many of the above expenses have specific guidelines to follow or documentation that is required to be considered non-taxable. Consult your payroll provider or appropriate resources with any questions.
Non-accountable plan expenses
Expenses reimbursed under a non-accountable plan are considered taxable income to the employee. Employers must withhold proper federal and state income and FICA taxes on this income. Additionally, employers must include these expenses when calculating Federal Unemployment Taxes (FUTA) and State Unemployment Taxes (SUTA).
Most fringe benefits are examples of taxable expenses. Other examples include:
- Vehicle Allowance
- Personal Use of a Company Vehicle
- Health Insurance Stipend (this is illegal under ACA UNLESS you have an HRA in place)
- Gym/Wellness Allowance
- Cell Phone Stipend (for personal use)
- Work from Home Stipend
- Gift cards or Gifts to Employees