Are Employee Reimbursements Taxable?

Employee reimbursements allow individuals to recover out-of-pocket expenses incurred while performing job duties. A common source of confusion is whether these reimbursements are subject to taxation. Their taxability depends on adherence to specific Internal Revenue Service (IRS) guidelines. Understanding these rules is important for tax compliance and financial planning.

Key Distinctions for Taxability

The Internal Revenue Service (IRS) distinguishes between two primary types of reimbursement arrangements: accountable plans and non-accountable plans. This distinction determines whether a reimbursement is included in an employee’s taxable wages. For a reimbursement plan to be considered “accountable” under Internal Revenue Code Section 62, it must satisfy three criteria.

First, the expenses must have a business connection, meaning they were incurred while performing services as an employee and relate to the employer’s business. Second, the employee must adequately substantiate these expenses within a reasonable period, providing documentation for the amount, time, place, and business purpose. A reasonable period is within 60 days of incurring the expense.

Third, the arrangement must require the employee to return any amount reimbursed in excess of the substantiated expenses within a reasonable timeframe, within 120 days of receiving the advance or being notified of the excess. If an arrangement fails to meet even one of these requirements, it is classified as a “non-accountable plan.”

Under a non-accountable plan, all reimbursements are treated as taxable wages to the employee. These amounts become subject to income tax withholding, Social Security taxes (FICA), and Medicare taxes, just like regular salary or wages. Employers must report these non-accountable reimbursements on the employee’s Form W-2.

Common Non-Taxable Reimbursements

Many common employee expenses can be reimbursed on a non-taxable basis if the employer operates an accountable plan. Business travel expenses are an example; reimbursements for transportation, lodging, and meals incurred while an employee is away from home overnight for business purposes are not taxable. Proper documentation substantiates their legitimacy.

Mileage reimbursement, when an employee uses a personal vehicle for business, is another frequent non-taxable reimbursement. Employers use the IRS standard mileage rate, which is 70 cents per mile for business use in 2025, to calculate these reimbursements. Employees must maintain detailed logs including dates, destinations, and business miles driven.

Business meals and entertainment expenses, while subject to deductibility limits for the employer, can be non-taxable to the employee if properly substantiated. Professional development or education expenses are also non-taxable if they are job-related and meet IRS criteria, such as maintaining or improving skills required for the job. Reimbursements for tools or supplies purchased by an employee for work purposes are non-taxable, provided there is a business connection and adequate substantiation.

Common Taxable Reimbursements

Some reimbursements are taxable to the employee because they do not meet accountable plan criteria or represent personal expenses. For instance, per diem allowances are taxable if provided without adequate substantiation or without a requirement to return any excess amounts. This applies when an employee receives a fixed daily amount but is not required to account for how the money was spent or to return unused funds.

Payments for personal expenses, such as commuting costs between an employee’s home and their regular workplace, are taxable. Reimbursements for personal travel or personal meals not incurred away from home overnight for business are taxable income. Fixed allowances, such as a flat car allowance or a cell phone allowance, where no substantiation is required or the employee is not obligated to return unused portions, are also treated as taxable wages.

Essential Documentation for Non-Taxable Reimbursements

Proper documentation is necessary for ensuring that employee reimbursements qualify as non-taxable under an accountable plan. Employees must provide clear and complete records to their employers for all reimbursed expenses. This documentation typically includes original receipts for all expenses, particularly for amounts over $75, though lodging expenses require receipts regardless of cost.

Beyond receipts, the documentation must detail specific information about each expense. This includes the date the expense was incurred and the exact amount of the cost. The place or location where the expense occurred, such as the city or the name of a restaurant, is also required. A clear explanation of the business purpose for the expense is necessary to demonstrate its connection to the employer’s business activities.

For business meals or entertainment, the names and business relationship of those entertained must be included. For vehicle expenses, detailed mileage logs are required, specifying dates, destinations, and the number of business miles driven. Without this thorough and timely substantiation, even legitimate business expenses may be reclassified as taxable income to the employee.