Reimbursable Employee Expenses

Generally, if an employee incurs legitimate business expenses on behalf of the company and pays for those expenses using their own money or a personal credit/charge card, the employee, subject to the company’s policy and its ownership or management’s approval, may submit a company expense report with the proper receipts/backup for reimbursement through the company. The company can subsequently enter that expense report into their accounting system and reimburse the employee. This reimbursement would be non-taxable to the employee and is generally a deductible business expense to the company with certain exceptions.

Now, you may ask, what if I, the business owner, want to reimburse employees for other types of expenses or costs through the company, some of which may not be direct business expenses?

In this situation, it really depends on numerous factors including, but not limited to:

• What type of expenses or costs are you reimbursing employees for?

• How much are those expenses or costs?

• Is the reimbursement for those expenses or costs covered under a specific company policy (ex: fringe benefits)?

• Where does the reimbursement of those expenses or costs fall within the then current local, state, and/or federal tax laws?

For instance, some companies may offer employees tuition reimbursement which is a fringe benefit rather than a reimbursement for a direct business expense. Depending on the then current tax laws, some of those monies (under a certain limit) may be treated as not only reimbursable but as non-taxable to the employee and a deductible business expense to the company.

However, if a company offers employees a monthly expense allowance and those employees do not need to submit receipts/backup for those expenses (ex: non-accountable plan), those monies will generally need to be treated as taxable to the employee and be reported on an employee’s Form W-2 as additional income subject to normal withholdings.

With many employers continuing to offer employees the option to work from home, those employers may want to offer employees some additional money to help them be more comfortable while working from home (ex: $1,000 one-time special allowance to buy items to work from home). Depending on how the reimbursement is structured, what exactly those employees purchase, and whether employees need to submit receipts/backup, will affect what can flow through the company and be treated as a reimbursable business expense (non-taxable) to the employee and a business expense/deduction to the company versus taxable income to the employee and possibly a business expense/deduction to the company. Keep in mind, if the monies need to be treated as taxable income to the employee, it should be reported on the employee’s Form W-2 and be subject to normal withholdings.

It goes without saying tax laws can be extremely complicated and they continually change so it’s best to consult with a professional like a CPA or tax professional when considering matters which may impact the tax liability of both the business and its employees.