Are All Employee Reimbursements Taxable?

Employee reimbursements are a common practice for businesses, where employees are paid back for expenses they incur on behalf of their employer. While these payments might seem straightforward, their tax treatment can vary significantly. Understanding when a reimbursement is considered taxable income and when it is not is important for both employers and employees to ensure compliance with tax regulations.

Accountable and Non-Accountable Plans

The Internal Revenue Service (IRS) distinguishes between two primary types of reimbursement arrangements: accountable plans and non-accountable plans. This distinction dictates whether reimbursements are included in an employee’s taxable income. An accountable plan must satisfy three specific criteria to be recognized by the IRS.

First, the expenses must have a business connection, meaning they were incurred while performing services as an employee. Second, the employee must adequately account for these expenses to the employer within a reasonable period. This typically involves providing detailed records, such as receipts, that show the amount, time, place, and business purpose of each expense. A reasonable period usually means submitting expenses within 60 days after they were paid or incurred.

Third, any excess reimbursement, or money advanced to an employee that exceeds the substantiated expenses, must be returned to the employer within a reasonable timeframe. The IRS generally considers 120 days after the expense was incurred as a reasonable period for returning excess amounts. When a reimbursement arrangement meets all three of these conditions, it operates as an accountable plan, and the reimbursements are generally not considered taxable income to the employee and are not reported on their W-2 form. This means these amounts are not subject to income tax withholding or FICA taxes (Social Security and Medicare).

Conversely, a non-accountable plan is any reimbursement arrangement that fails to meet one or more of these three requirements. For instance, if an employer provides a flat allowance for expenses without requiring substantiation or the return of unused funds, it is a non-accountable plan. Reimbursements made under a non-accountable plan are treated as taxable wages to the employee. These amounts are subject to income tax withholding and FICA taxes and must be reported as gross wages on the employee’s W-2 form.

Tax Treatment for Specific Expenses

The tax treatment of specific reimbursed expenses depends heavily on whether the employer’s reimbursement plan qualifies as an accountable plan. For common business expenses, adherence to accountable plan rules dictates whether the reimbursement is taxable to the employee.

Business travel expenses, such as transportation, lodging, and meals while away from home for work, are typically non-taxable if reimbursed under an accountable plan. Employers may use actual expenses or simplified per diem rates set by the IRS to reimburse employees for lodging, meals, and incidental expenses. For instance, for fiscal year 2025, the standard per diem rate for high-cost areas within the continental U.S. is $319, which includes $86 for meals and incidental expenses. For other areas, the rate is $225, with $74 allocated for meals and incidentals. For vehicle use, the IRS standard mileage rate for business in 2025 is 70 cents per mile. If an employer reimburses at or below these federal rates and the employee provides proper substantiation, the reimbursement is generally not taxable.

Business meals, when reimbursed under an accountable plan, are generally not taxable to the employee. However, the employer’s deduction for these meals is typically limited to 50% of the cost, provided the meal is not lavish, has a clear business purpose, and the taxpayer or an employee is present. Entertainment expenses, such as tickets to sporting events, are generally not deductible for the employer, but related meal costs may still be 50% deductible if separately stated.

Reimbursements for education expenses can be non-taxable if the education maintains or improves skills required for the employee’s current job, or is required by the employer or law to keep the job. If the education qualifies the employee for a new trade or business, the reimbursement may be considered taxable income.

Most moving expense reimbursements are taxable for non-military personnel. The Tax Cuts and Jobs Act of 2017 suspended the deduction for moving expenses for most taxpayers from 2018 through 2025, making reimbursements for these costs generally taxable as wages. Only active-duty military members moving due to a permanent change of station can still exclude qualified moving expense reimbursements from their income.

Reimbursements for work-related tools and equipment are typically non-taxable to the employee when provided under an accountable plan. To qualify, the tools must be necessary for performing the employee’s job duties, and the employee must adequately account for the expenses. If the reimbursement is not made under an accountable plan, it becomes taxable income to the employee.

Reporting Taxable Reimbursements

When employee reimbursements are considered taxable, employers are required to report these amounts to the IRS and to the employee. Taxable reimbursements are typically included in an employee’s gross wages, which are reported in Box 1 of Form W-2, Wage and Tax Statement. This means the reimbursement is subject to federal income tax withholding, Social Security, and Medicare taxes, just like regular wages.

For individuals who are not employees, such as independent contractors, taxable reimbursements might be reported on Form 1099-NEC, Nonemployee Compensation, if the payment meets the reporting threshold. If the payment falls under other categories, it could be reported on Form 1099-MISC, Miscellaneous Information.

Employees generally cannot deduct unreimbursed employee business expenses on their personal tax returns. The Tax Cuts and Jobs Act of 2017 suspended the deduction for most unreimbursed employee expenses from 2018 through 2025. Since taxable reimbursements are already included in Box 1 of the W-2, they are automatically accounted for in the employee’s taxable income when they file their Form 1040.

Business travel expenses, such as transportation, lodging, and meals while away from home for work, are typically non-taxable if reimbursed under an accountable plan. Employers may use actual expenses or simplified per diem rates set by the IRS to reimburse employees for lodging, meals, and incidental expenses. For instance, for fiscal year 2025, the standard per diem rate for high-cost areas within the continental U.S. is $319, which includes $86 for meals and incidental expenses. For other areas, the rate is $225, with $74 allocated for meals and incidentals. For vehicle use, the IRS standard mileage rate for business in 2025 is 70 cents per mile. If an employer reimburses at or below these federal rates and the employee provides proper substantiation, the reimbursement is generally not taxable.

Business meals, when reimbursed under an accountable plan, are generally not taxable to the employee. However, the employer’s deduction for these meals is typically limited to 50% of the cost, provided the meal is not lavish, has a clear business purpose, and the taxpayer or an employee is present. Entertainment expenses, such as tickets to sporting events, are generally not deductible for the employer, but related meal costs may still be 50% deductible if separately stated.

Reimbursements for education expenses can be non-taxable if the education maintains or improves skills required for the employee’s current job, or is required by the employer or law to keep the job. If the education qualifies the employee for a new trade or business, the reimbursement may be considered taxable income.

Most moving expense reimbursements are taxable for non-military personnel. The Tax Cuts and Jobs Act of 2017 suspended the deduction for moving expenses for most taxpayers from 2018 through 2025, making reimbursements for these costs generally taxable as wages. Only active-duty military members moving due to a permanent change of station can still exclude qualified moving expense reimbursements from their income.

Reimbursements for work-related tools and equipment are typically non-taxable to the employee when provided under an accountable plan. To qualify, the tools must be necessary for performing the employee’s job duties, and the employee must adequately account for the expenses. If the reimbursement is not made under an accountable plan, it becomes taxable income to the employee.

Reporting Taxable Reimbursements

When employee reimbursements are considered taxable, employers are required to report these amounts to the IRS and to the employee. Taxable reimbursements are typically included in an employee’s gross wages, which are reported in Box 1 of Form W-2, Wage and Tax Statement. This means the reimbursement is subject to federal income tax withholding, Social Security, and Medicare taxes, just like regular wages.

For individuals who are not employees, such as independent contractors, taxable reimbursements might be reported on Form 1099-NEC, Nonemployee Compensation, if the payment meets the reporting threshold. If the payment falls under other categories, it could be reported on Form 1099-MISC, Miscellaneous Information.

Employees generally cannot deduct unreimbursed employee business expenses on their personal tax returns. The Tax Cuts and Jobs Act of 2017 suspended the deduction for most unreimbursed employee expenses from 2018 through 2025. Since taxable reimbursements are already included in Box 1 of the W-2, they are automatically accounted for in the employee’s taxable income when they file their Form 1040.