IRS Rules for Internet Reimbursement: Is It Taxable?

As remote work becomes more common, many employers reimburse employees for home internet costs. Whether this reimbursement is considered taxable income depends on the employer’s policy structure and its adherence to Internal Revenue Service (IRS) guidelines. A properly structured plan allows the payment to be excluded from an employee’s income. An improperly structured plan results in the full amount being added to an employee’s wages and taxed accordingly.

The Accountable Plan Framework

For an internet reimbursement to be tax-free, it must be provided under an “accountable plan.” This is not a product an employer buys, but a set of IRS rules for reimbursing business expenses. If a policy meets three specific tests, it qualifies as an accountable plan and payments are not considered wages. Failing to meet even one of these tests disqualifies the plan and changes the tax outcome.

The first requirement is that the expense must have a business connection, meaning it was a necessary cost for performing the job. For home internet, an employer’s requirement to work remotely establishes this connection. The expense must be an ordinary and necessary cost for the employee to fulfill their duties from home.

Second, the employee must adequately account for the expense to the employer within a reasonable period. This involves providing proof of the cost and its business purpose, also known as substantiation. The IRS defines a reasonable period for substantiation as within 60 days after the expense was paid or incurred. This rule ensures that reimbursements are tied to documented expenses.

Finally, the employee must return any excess reimbursement to the employer within a reasonable time. For instance, if an employee receives a cash advance and the actual cost is less, they cannot keep the difference. The IRS considers a reasonable period for returning excess funds to be within 120 days after the expense was paid or incurred. This prevents plans from being used to provide hidden, tax-free compensation.

Substantiating Business Use of Internet

Home internet is often used for both business and personal activities, so employees must substantiate the business-use portion of the cost. Under accountable plan rules, an employer can only provide a tax-free reimbursement for the part of the expense attributable to business use. The employee is responsible for calculating a reasonable allocation and providing supporting documentation, which meets the “adequate accounting” requirement.

A common method for allocating the cost is to estimate business versus personal use. An employee can track work-related internet hours against personal use hours in a typical month. For example, if an employee works 200 hours and the household has 200 hours of personal use, a 50% business-use allocation is reasonable. This calculation should be documented and provided to the employer with the internet bill.

Another approach is the “but-for” test, which asks if the employee would have the service without the job. If an employee already had internet for personal use, they cannot be reimbursed for the entire bill. In this case, only the additional cost incurred for work can be reimbursed, such as upgrading to a more expensive, higher-speed plan to handle work tasks.

To substantiate the expense, an employee must maintain clear records. This includes copies of monthly internet statements showing the provider, billing period, and total cost. The employee should also submit a written statement to their employer explaining the method used to determine the business-use percentage. A log of work hours or a record of a required service upgrade provides the necessary proof.

Tax Treatment Under Different Reimbursement Plans

Accountable Plan

When a policy qualifies as an accountable plan, reimbursement payments are not considered income. These amounts are not reported as wages on the employee’s Form W-2 and are not subject to federal income tax withholding. The reimbursements are also exempt from payroll taxes, including Social Security and Medicare (FICA). This makes it a true reimbursement, where the employee is made whole for a business expense.

Nonaccountable Plan

A policy that fails to meet the accountable plan conditions is a “nonaccountable plan.” A common example is an employer providing a flat monthly stipend for internet costs without requiring receipts. All payments under a nonaccountable plan are treated as taxable wages. The full amount is included in the employee’s gross income, reported on their Form W-2, and is subject to federal income and payroll taxes like FICA and FUTA. From a tax perspective, this stipend is no different from a regular salary payment.

Reimbursements vs The Home Office Deduction

Employees often confuse receiving a reimbursement with taking a personal tax deduction. The ability for W-2 employees to deduct unreimbursed job expenses was suspended by the Tax Cuts and Jobs Act of 2017 (TCJA). This change, effective for tax years 2018 through 2025, eliminated the miscellaneous itemized deduction for costs like home internet.

Due to this change, employees currently have no federal tax deduction for unreimbursed home internet expenses. This makes employer reimbursement through an accountable plan the only way for an employee to receive a tax benefit for this work-related cost.