Is Company Reimbursement Considered Taxable?

Company reimbursement refers to payments an employer makes to an employee for expenses incurred while performing job duties. Whether these reimbursements are subject to income tax depends on how the employer’s reimbursement plan is structured. Understanding these distinctions is important for proper tax reporting. This article clarifies the types of company reimbursements and their tax implications under IRS guidance.

Non-Taxable Company Reimbursements

Company reimbursements are non-taxable when paid under an “accountable plan,” as defined by the IRS. An accountable plan must satisfy three rules. The first rule requires a business connection, meaning the expense must be ordinary and necessary for the employer’s trade or business. This ensures the expense directly relates to the employee’s job responsibilities.

The second rule mandates substantiation. Employees must provide adequate records of their expenses to the employer within a reasonable period. These records include receipts, dates, amounts, and the business purpose for the expense. For example, an employee traveling for work would submit receipts for lodging, transportation, and business meals.

The third rule requires the employee to return any excess reimbursement or advance that is not substantiated within a reasonable timeframe. A common timeframe for returning excess amounts is within 120 days after the expense was paid or incurred, or within 30 days after the employer provides a periodic statement. When all three conditions are met, reimbursements are not treated as wages, are not subject to income tax withholding, and are not reported on the employee’s Form W-2.

Taxable Company Reimbursements

Reimbursements become taxable when paid under a “non-accountable plan.” This occurs if any of the three requirements for an accountable plan are not met. For instance, if an employer provides a fixed allowance for expenses without requiring the employee to submit receipts or prove the business purpose, this constitutes a non-accountable plan. Similarly, if an employee receives an advance and is not required to return any unsubstantiated portion, the entire advance may be considered taxable.

Reimbursements for personal expenses, such as commuting costs not directly related to business travel, are also taxable. When a reimbursement falls under a non-accountable plan, the amount is treated as supplementary wages. This means it is subject to federal income tax withholding, as well as Social Security and Medicare taxes, known as FICA taxes.

These taxable reimbursements are included in the employee’s gross wages and reported on Form W-2. They will be included in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). This increases the employee’s taxable income, potentially leading to a higher tax liability.

Documentation and Compliance

Proper documentation is important for both employees and employers to ensure reimbursements are treated correctly for tax purposes. Employees should maintain detailed records for all business expenses, including original receipts, the date and amount of each expense, the place where the expense was incurred, and the specific business purpose. For meals and entertainment, the names of attendees and their business relationship should also be noted. Submitting these records promptly to the employer helps meet the substantiation requirement of an accountable plan.

Employers have a responsibility to establish clear, written reimbursement policies that align with IRS guidelines for accountable plans. These policies should outline eligible expenses, required documentation, and the timeframe for submitting expenses and returning excess advances. Correctly classifying and reporting reimbursements on Form W-2 is also a compliance obligation. This commitment to record-keeping and policy adherence helps ensure business expense reimbursements remain non-taxable.