Do You Get Taxed on Expense Reimbursements?

Expense reimbursements are payments from an employer to an employee for business-related costs incurred while performing services. The tax treatment of these reimbursements depends on how the employer’s arrangement is structured. Understanding the distinction between different types of reimbursement plans is important for both employees and employers to ensure compliance with tax regulations.

Understanding Accountable Plans

An accountable plan is an employer’s expense reimbursement arrangement that meets specific Internal Revenue Service (IRS) requirements, allowing reimbursements to be non-taxable to the employee. To qualify, the arrangement must satisfy three criteria.

First, the expenses must have a business connection, meaning they were incurred while the employee was performing services for the employer. Second, the employee must adequately account for these expenses to the employer within a reasonable period, typically by providing documentary evidence like receipts detailing the amount, time, place, and business purpose. The IRS considers an expense accounted for if substantiated within 60 days after it was paid or incurred.

Third, the employee must return any excess reimbursement not spent on business expenses within a reasonable period, generally within 120 days after the expense was paid or incurred or after receiving a periodic statement.

When an arrangement meets these three conditions, reimbursements are not included in the employee’s gross income. These amounts are not subject to income tax withholding, Social Security, or Medicare taxes, and are not reported as wages on the employee’s Form W-2. This benefits both the employee by not increasing their taxable income and the employer by avoiding payroll tax liabilities.

Understanding Non-Accountable Plans

A non-accountable plan is any expense reimbursement arrangement that fails to meet one or more of the three requirements for an accountable plan. For instance, if an employer provides a flat allowance for expenses without requiring receipts or justification, this constitutes a non-accountable plan.

Reimbursements received under a non-accountable plan are considered taxable income to the employee. These amounts are treated as supplemental wages and are subject to income tax withholding and payroll taxes. Employers must report these amounts as wages on the employee’s Form W-2. The Tax Cuts and Jobs Act of 2017 eliminated itemized deductions for unreimbursed employee expenses for tax years 2018 through 2025, meaning employees cannot deduct expenses reimbursed under a non-accountable plan on their personal tax returns.

Application to Common Expense Types

These principles apply to various common employee expenses. For business travel, employers often use per diem rates, daily allowances for lodging, meals, and incidental expenses, to simplify substantiation. For Fiscal Year 2025, the standard per diem rate for most continental U.S. locations is $178 per day, with higher rates for high-cost localities (e.g., $319).

When an employer reimburses mileage for business use of a personal vehicle, they can use the IRS standard mileage rate. For 2025, the business mileage rate is 70 cents per mile. This rate covers variable costs like fuel, maintenance, and depreciation. If an employer reimburses at a rate higher than the standard mileage rate, the excess amount becomes taxable income to the employee.

For business meals, a 50% deduction limit applies for the employer, even when meals are part of business travel. Professional development expenses, such as training or conference fees, can also be reimbursed under an accountable plan.

Tax Reporting for Employees and Employers

The reporting of expense reimbursements on tax forms differs based on whether the employer’s plan is accountable or non-accountable. For reimbursements made under an accountable plan, the amounts are not considered part of the employee’s gross income. These reimbursements are not reported on the employee’s Form W-2. This means employees do not need to list these reimbursed amounts as income on their personal tax returns.

If reimbursements are made under a non-accountable plan, they are treated as taxable wages. Employers must include these amounts in Box 1 (Wages, tips, other compensation) of the employee’s Form W-2. This ensures the reimbursements are subject to federal income tax withholding and applicable payroll taxes. Employees then include these amounts as part of their total wages when filing their tax returns.