Do Company Reimbursements Get Taxed?

Company reimbursements for employee expenses have varied tax implications. Whether these payments are subject to taxation depends on specific Internal Revenue Service (IRS) regulations. Some reimbursements are structured to be entirely tax-free for the employee, while others are considered taxable income, impacting both the employee’s gross pay and the employer’s payroll obligations. Understanding the distinctions between various reimbursement arrangements is important for both businesses and their employees to manage financial responsibilities accurately.

The Accountable Plan

An accountable plan allows tax-free reimbursement for business-related expenses. To qualify as an accountable plan under IRS guidelines, the arrangement must satisfy three specific requirements, ensuring that reimbursements are not considered wages. When these criteria are met, the reimbursed amounts are not subject to income tax withholding or payroll taxes for the employee.

First, the expenses must have a clear business connection, meaning they were incurred or paid while the employee was performing services for the employer. Personal expenses are not eligible for reimbursement under an accountable plan, though the business portion of mixed-use expenses, like a personal vehicle used for work, can qualify. Second, the employee must adequately account for these expenses to the employer within a reasonable period. This involves submitting detailed expense reports, along with supporting documentation such as receipts or invoices, that show the amount, time, place, and business purpose of the expense. The IRS considers 60 days after the expense was paid or incurred, or after a business trip ends, as a reasonable timeframe for substantiation.

Third, the employee must return any excess reimbursement or allowance within a reasonable period. If an employee receives an advance for anticipated expenses and does not spend the entire amount, the unspent portion must be returned to the employer. The IRS considers 120 days after the expenses were paid or incurred as a reasonable period for returning excess funds. Failure to return excess amounts can cause those specific amounts to become taxable. Meeting these three conditions ensures that the reimbursement is viewed as the employer simply paying back the employee for company costs, rather than providing additional compensation.

The Non-Accountable Plan

A non-accountable plan is any reimbursement arrangement that fails to meet one or more of the three requirements necessary for an accountable plan. This occurs when an employer provides a fixed allowance for expenses without requiring substantiation, or when the employee is not obligated to return any excess funds. Such arrangements are considered less stringent in oversight of employee spending.

Under a non-accountable plan, all reimbursements are treated as taxable wages to the employee. This means the reimbursed amounts are subject to federal income tax withholding, Social Security taxes, and Medicare taxes, just like regular earnings. For example, if an employer provides a flat monthly stipend for transportation costs without requiring receipts or reconciliation, this stipend would be considered taxable income. Similarly, if an employee receives an advance for a business trip but is not required to account for the expenses or return unspent money, the entire advance becomes taxable.

These reimbursements increase the employee’s taxable income, which can affect their overall tax liability and net take-home pay. The employer also incurs additional payroll tax liabilities on these amounts. Consequently, while non-accountable plans may seem simpler due to less documentation, they carry significant tax disadvantages for both employees and employers.

Reporting Taxable Reimbursements

When reimbursements are taxable under a non-accountable plan, they are reported as part of the employee’s regular wages. These amounts are included in Box 1, “Wages, tips, other compensation,” of the employee’s Form W-2. This ensures that the taxable reimbursements are properly accounted for as income.

In addition to being included in Box 1, these taxable reimbursements are subject to income tax withholding. This means that federal income tax, and potentially state and local income taxes, are deducted from these amounts by the employer before the employee receives their pay. Furthermore, these amounts are also subject to payroll taxes, specifically Social Security and Medicare taxes, which fund federal programs. Unlike reimbursements under an accountable plan, which are not reported on the W-2, non-accountable plan reimbursements are fully integrated into the employee’s taxable compensation.