In the state of California, employers are generally expected to reimburse employees for business expenses such as travel costs and equipment. Under federal law, the Fair Labor Standards Act states that work expenses cannot cause an employee to make less than minimum wage. It is important that these expenses are tracked, documented, and reimbursed properly. Otherwise, there can be serious errors in calculating finances and payroll taxes. If you are unsure how to report job related expenses or have concerns that you are not being reimbursed properly, you may want to educate yourself on your rights and your employer’s responsibilities.
What is Expense Reimbursement?
If an employer expects their employees to have out of pocket expenses related to their work, they should have a policy and system in place for the employee to report those expenses and be reimbursed. This policy should give a clear understanding of what expenses they will and will not reimburse as well as what is expected of the employee in order to receive reimbursement. Some of the more common expenses that might be reimbursed can include:
- Gas milage and other travel costs
- Working lunches and events
- Training and education
- Business use of personal phone or personal vehicle
- Supplies, equipment, and other tools
The employer may require their employees to provide receipts or fill out certain paperwork in order to receive reimbursement.
What Should Businesses Cover?
The general consensus is that the costs needed to maintain business operations should be the responsibility of the employer. This can be a slightly subjective concept that allows some room for different employers to have their own criteria for what they will cover. For example, if an employee must travel for work as part of their job duties, then many if not most of the expenses involved may be reimbursable or covered by the employer. Necessary business costs can include:
- Gas milage and parking
- Lodging and meals
- Printing and delivery fees
- Laundry and dry cleaning
- International travel costs
Travel Expenses
The Internal Revenue Service recognizes that travel expenses are a necessary part of business operations and employers are often permitted to tax deductions on such expenses. The IRS has a rate for tax deductions on travel expenses and employers will often base their own policies on that. They may also have set budgets or per diem rates to simplify the reporting and calculating process. Companies are allowed to choose what they will reimburse, but some of the usual travel expenses include but are not limited to:
- Train or airplane tickets
- Taxis, ride-shares, or rentals
- Gas milage and maintenance
- Hotel accommodations
- Laundry services
- Food and some entertainment
- Event registration fees
- Currency conversion fees
- Visas and/or passports
- Tolls, gratuity, and extra fees
Employee Meal Expenses
Many employers will offer free meals to their employees which will then be accounted as an employee business expense. This is common in restaurants where employees are able to eat for free or at a discounted rate at the establishment. There are also those that cover or reimburse employees for meals needed while working, lunch meetings, special occasions, and even costs incurred while entertaining clients or business partners. Employers may reimburse their employees for 100% of business related meal expenses including gratuity. However, only 50% is tax deductible for the employer.
Uniforms and Supply Expenses
Some jobs require specific clothing and equipment or other out of pocket expenses for their employees. Many companies will reimburse these expenses, and some labor unions will include the employer’s responsibility for these costs in the collective bargaining agreement. Some examples of these expenses can include but are not limited to:
- Clothing / Uniforms
- Education
- Electronics
- Marketing
- Postage
- Tools
What Are Normally Not Covered by Businesses?
For the most part, outside of some regulations, reimbursement is often up to the discretion of the employer. There are many expenses that an employee may incur due to their job that their employer does not consider to be reimbursable. Work related expenses that are often not covered include but are not limited to:
- Salon visits
- Car maintenance
- In-flight extras
- Alcohol
- Toiletries
- Decorations
- Personal entertainment
- Lost or damaged property
- Medical care
- Tickets and fines
- Childcare
- Optional upgrades
There may be some disagreement between the employer and the employee on whether certain expenses are necessary and should be reimbursed. There are many people who believe that daily commuting time and expenses should be compensated. Some employers will require employees to maintain the highest level of personal appearance, but do not reimburse them for the costs involved.
Are Employee Reimbursements Taxable?
For the most part, the IRS determines whether employer reimbursements are taxable based on how they are reported. Non-accountable plans include reimbursement amounts as employee’s wages on the form W-2 and may require payroll taxes to be paid. Accountable plans do not count reimbursements as taxable income and require the employee to report the expenses as itemized deductions. Things like personal use of company provided equipment or expensive gifts and prizes may come with their own tax implications.
Accountable vs Nonaccountable Reimbursement Plans
It is important for both the employer and the employee to understand the rules and regulations for reporting business expenses and reimbursements to the IRS. Both plan categories come with their own process and required documentation. As an employee, you want to know which plan your employer is utilizing so that you know what your rights and responsibilities are come tax time.
Accountable Plans
Accountable plans are a way for employers to track and document expenses and reimbursements. Typically, the employees submit paperwork and receipts for all of the out of pocket business expenses they incurred. The employer then reimburses them and can claim the business expenses as deductions on their taxes. In these aituations, the employee does not have to claim or pay income tax on the reimbursement amounts.
Nonaccountable Plans
If expenses and reimbursements are not properly documented and accounted for, then the employer and employee may have to pay taxes for supplemental wages. Non-accountable plans often involve prepaid allowances given to the employee for upcoming expenses. Rather than reporting what the expenses were and returning what is left afterwards, the lump sum is considered taxable income. The employee can then claim each expense as itemized deductions on their own taxes.
Taxable Reimbursements
There are also specific situations and types of reimbursements or perks that usually come with tax responsibilities for the employee, such as:
- If an employee uses a company vehicle for personal use
- If an employee receives prizes such as goods or services
- If an employee receives complementary services from the business
Different scenarios come with different parameters, so it is important to know exactly what your responsibilities are.
Generally Nontaxable Employee Reimbursements
There are also various situations and types of reimbursements or perks that usually do not come with any tax responsibilities for the employee, such as:
- Reimbursements properly documented under an accountable plan
- Education costs below $5,250
- Group life insurance below $50,000
- Low value gifts and prizes
- Eligible retirement planning services
- Discounts on goods and services below 20%
- Eligible on site room and board
- Use of company vehicle for commuting
- Parking passes, transit fare, etc. below $250 each month
How Should Employees Report Expenses?
Employees do not need to report reimbursements to the IRS. If they are under a nonaccountable plan and wish to claim their business expenses, they can list them as itemized reductions when they file. The employer determines how these expenses and reimbursements will be documented and reported. They are then responsible for making sure the employee is taken care of and the information is given to the IRS correctly. Some of the ways companies handle reimbursement can include:
- Employee pays out of pocket and submits receipts and expense report to employer
- Employer provides employee with company credit card
- Employer provides employee with per diem allowance
- Employer provides lump sum allowance for project or trip
Can Employee Expenses Be Reimbursed Through Payroll?
Employers are permitted to reimburse their employees through payroll. If the reimbursement is part of an accountable plan, the amount will not be considered part of their taxable income. If it is a nonaccountable plan, they will have to pay income tax on supplemental wages. Be sure that your employer is reporting your income correctly on your W-2 forms.
How Long Should Employee Reimbursement Take?
The timeline for reimbursements is generally up to the employer’s discretion. Their respective policies and procedures will usually explain any deadlines or timeframes. These might be done on a regular basis such as monthly or quarterly, or counted from the date the expense was incurred.
What Happens When Expenses are Not Reimbursed?
Sometimes, employers may not hold up their end of the agreement when it comes to reimbursement, or an error may occur somewhere in the process. It is important to keep comprehensive records of your business expenses and copies of all receipts so that you can be sure things are accurate on your end. An honest employer should have a procedure for addressing any miscalculated or overlooked expenses and unpaid reimbursements. If an employer has a reimbursement process in place but does not honor it for specific employees out of discrimination or retaliation, there may be a viable employment claim.
Contact Mesriani Law Group if You Are Owed Employee Expenses
Any benefits offered by an employer should be done so fairly. There is a lot of room for employers to make their own decisions regarding employee expense reimbursement, but there are still rules they have to follow. If an employer is deliberately withholding reimbursements that they would otherwise give due to an employee belonging to a protected class or engaging in a protected activity, they should be held accountable. Our firm has years of experience fighting employment discrimination and retaliation and our employment attorneys are dedicated to obtaining fair compensation for our clients. If your employer is using reimbursement as a discrimination or retaliation tactic, call Mesriani Law Group today for a free consultation.
Employee Expense Reimbursement FAQs
What is employee expense reimbursement?
When an employee has paid or is expected to pay out of pocket for business related expenses, they may be reimbursed by their employer. The process and procedures involved are generally up to the discretion of the employer. It is important to know exactly what your employer will reimburse you for and what they require from you. If you have any out of pocket business expenses, it is always a good idea to keep the receipts and a detailed ledger.
What is an example of expense reimbursement?
There are many different types of situations that may involve employee expense reimbursement.
• Mitch drives out of town to meet a client at their home because they are unable to come to the office. He documents the miles he traveled and submits the information to his boss who reimburses him for the gas money.
• Sam is given a company credit card to use on a week-long business trip overseas. They keep a record of what each of the charges are for to be submitted when they return the card to their employer.
• Lou uses his own money to buy supplies from the grocery store every time the café runs out during the lunch rush. He gives the receipt to his manager so they can pay him back.
• Aly is going to a three day conference in order to do networking for her company. Before she leaves, her employer writes her a check for an amount large enough to cover any related costs.
How do you account for employee expense reimbursements?
In some cases, the employee provides the employer with receipts and documentation for each of the expenses and the employer pays them back. In other cases, the employer may give the employee money in advance. Sometimes, the employee will return whatever was not spent with receipts and documentation accounting for the expenses. Sometimes, the employee will keep the whole amount and it will be accounted for as paid supplemental wages. The employee can then report the expenses to the IRS for tax deductions.
Are expense reimbursements taxable for employees?
Different expense reimbursement plans have different tax implications. If an employer is utilizing an accountable plan that is properly documented, the reimbursements paid to the employee would not be considered taxable income. However, if they are utilizing a nonaccountable plan, the reimbursements paid to the employee would be considered supplemental wages that the employee may have to pay taxes on. In that case, the employee can also claim the business expenses as itemized deductions when they file their taxes.
