Are Employee Reimbursements Taxable?

Employee reimbursements are payments made by an employer to cover work-related expenses incurred by employees. These can include travel expenses, business supplies, meals, and other costs necessary for performing your job. 

Expense reimbursements can be taxable or non-taxable, depending on the plan under which your employer provides them. Here’s an overview of the criteria for both plans and examples of both taxable and non-taxable reimbursements.

Expense reimbursements provided under an accountable plan (non-taxable)

An accountable plan is a reimbursement arrangement that meets the IRS requirements for non-taxable expense reimbursements. The reimbursement plan must meet the following criteria to be considered accountable:

• Business use: The expenses must be related to your job. You must have paid or incurred deductible expenses while performing services for your employer.
• Proof of expenses: You must provide records of these expenses within a reasonable period (the IRS considers that to be 60 days). This typically involves providing receipts, the time and place the expense was incurred, and the business purpose.
• Return of excess money: You must return any excess reimbursement or allowance to your employer within a reasonable period. The IRS considers a reasonable period of time for the return of excess amounts to be 120 days.

If your reimbursements meet the above criteria, they will not be included in your wages and will not be subject to income tax or employment taxes. This makes accountable plans advantageous for both employers and employees.

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Expense reimbursements provided under a non-accountable plan (taxable)

Non-accountable plans don’t meet the IRS requirements for non-taxable reimbursements. It means that:

• You aren't required to substantiate expenses with receipts or other documentation.
• You aren't required to return any excess amounts your employer has provided.

Because these plans don’t meet the IRS criteria, all reimbursements provided under non-accountable plans are considered income and are taxable. They must be included in your wages and are subject to income tax, Social Security, Medicare, and unemployment taxes.

Examples of non-taxable employee reimbursements

See the examples below to better understand when your reimbursements will not be taxed as part of your income, and the conditions you’ll have to meet. 

Travel reimbursements

Reimbursements for expenses like meals, lodging, and travel when going away on business are not taxable if you keep relevant receipts and receive reimbursement according to the actual expenses you’ve had, or if your employer reimburses you with the official IRS per diem rates. Learn more about the IRS rules on employee travel expenses.

Business mileage reimbursements

Your mileage reimbursement will not be taxed if you keep a detailed mileage log documenting the miles you've driven for business purposes, and your employer reimburses you at the standard IRS mileage rate or a rate below the official one. Any excess will be taxed as part of your income. Read more about receiving mileage reimbursement from your employer and download the free IRS mileage log template to record your business mileage.

Cell phone reimbursements

If your employer has provided you with a phone you mainly use for business purposes, this benefit is non-taxable. You can occasionally use the phone for personal calls without triggering a taxable reimbursement. The main requirement is that the phone is primarily used for business purposes.

Moving expenses reimbursements

According to the 2018 Tax Cuts and Jobs Act, moving expense reimbursements are now taxable for all employees except for active-duty members of the Armed Forces. You can read more on the IRS moving mileage for members of the Armed Forces.

Practical implications for employees and employers

Employees

Reimbursements under a non-accountable plan increase your taxable income, potentially placing you in a higher tax bracket and affecting take-home pay. Proper documentation and timely submission of expense reports are crucial to ensure that your reimbursements remain non-taxable.

Employers

Employers need to design their reimbursement policies to meet accountable plan criteria to avoid additional payroll taxes. This involves setting clear guidelines for expense reporting and ensuring compliance with substantiation and return of excess reimbursement rules.

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