Even with many businesses returning employees to the office, there are millions of Americans working remotely. The number of work from home jobs and employees is only expected to grow. When an employer has employees working remotely, there are many challenges that they must be aware of. From payroll taxes, to labor laws and even expense reimbursements, knowing regulations surrounding remote workers is key to maintaining compliance for your business. In this article, we will take a look at how to deal with reimbursing your remote employees.
What items could remote employees be reimbursed for?
When employees work from home, there are a number of items in which they could be reimbursed for. These items include, but may not be limited to:
- Phone use for business purposes
- Office furniture like desks and chairs
- Office supplies such as pens, paper, etc
- Home services including electricity and internet
Are employers required to reimburse remote employees for these items on the federal level?
There are no federal laws that require an employer to reimburse a remote employee for work expenses. However, according the the Fair Labor Standards Act (FLSA), an employer would be required to reimburse an employee for a work expense, only if that work expense causes the employee’s earnings to drop below minimum wage.
For example, in Maine the minimum wage is currently $12.75 per hour. An employee that works remotely and receives minimum wage needs to buy office supplies. At the end of the week, because they paid for those supplies out of pocket, their earnings dip below $12.75 per hour. In this case, the employee would need to receive reimbursement for those items.
Additionally, an employer may not require an employee to pay for a company supplied item, like a laptop, if that would reduce the employee’s salary below minimum wage.
Are employers required to reimburse remote employees for these items at the state level?
Some states have begun to enacted laws that require employers to reimburse their remote workers. These states include California, Illinois, Iowa, Massachusetts, Minnesota, Montana, New Hampshire, New York, North Dakota, Pennsylvania, and South Dakota, as well as Washington D.C. In these states, remote workers are required to be reimbursed for work expenses that are considered necessary. There are two things to consider in this instance.
- First, if an employee chooses to work remotely, most of the time the expenses are not considered necessary.
- Secondly, if the employer requires the employee to work remotely, or the position is considered a full-time remote position, then the employee would be reimbursed for those expenses that are considered necessary to perform their work.
While there is some gray area, items that are considered necessary to perform work can include:
- Phone use for business purposes
- Office supplies
- Internet services
- Online subscriptions such as Zoom
Are these reimbursements taxable?
YES! Reimbursements made to remote employees are considered taxable income. This is because they are not a business necessity. Be sure factor in any reimbursements made as part of the employee’s income when withholding proper payroll taxes. These reimbursements will affect the amount of FICA taxes withheld, as well as the amount of Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA) that a business will pay.
How should employers handle these reimbursements?
It is critical to have an expense management policy in your employee handbook. Note what expenses are reimbursable and the process for employees to receive their reimbursements. Whatever your policy is, make sure it is in compliance with federal and state law (if you operate in one of the states mentioned above). If you have employees working remotely in multiple states, you may have to have different guidelines for each state. Once you policy is outlined, be consistent across the board.
One way to handle this situation is by providing a monthly work stipend to remote employees to cover expenses. This could be used as part of your benefits package to attract and retain your employees. If doing so, remember that in most cases work stipends are considered taxable income. Subsequently, be sure to withhold necessary taxes on this income and report this on Form W-2.