Employee reimbursement, a topic we hear about on a daily basis from our customers. Whether they’re new employees that don’t understand how much they’ll be reimbursed, or those wondering if expenses can be deducted on their personal tax returns.
We see it all!
There are often so many questions regarding employer’s reimbursing employee expenses that we felt it would help clear up the confusion for a bunch of people by writing a dedicated article on the topic.
If you have any questions for the Everlance team regarding expenses, don’t hesitate to comment below!
What Is Employee Expense Reimbursement?
Employee expense reimbursement is a popular method that employers use to repay employees who spend their personal money during the course of business-related activities on expenses that are deemed reimbursable.
We know, it sounds incredibly complex and in a sense, it can be, but the good news is that most employers have very specific guidelines in their expense policy regarding which expenses can or can’t be reimbursed. And that doesn’t even touch on the fact that many employers that have employees regularly in the field, or on the business travel issue per diems to cover all of their potential expenses (within reason, of course!)
IRS Rules For Employee Reimbursement
Before we talk about how employers reimburse employees, let’s first take a look at the IRS guidelines for employee reimbursement. After all, employers have to follow these rules so it’s very likely that what you see in the IRS guidelines are going to be very similar to the rules your employer sets forth in their expense reimbursement policy.
IRS Rules Regarding Expense Reimbursement
Here’s the tricky part. All employer expense reimbursement policies need to be in strict compliance of Federal regulations or all employee expense reimbursement is considered taxable income for the employee and the employer would owe payroll taxes on the total amount as well!
An employer expense policy must meet these minimum requirements to be qualified as an “Accountable Plan”.
1. Reimbursement: The policy must state that employees can only be reimbursed for necessary business expenses that were paid for or incurred as an employee during official business activities. This means that non-business expenses, even if occurring during the course of “business” would not count. This needs to be clearly outlined.
2. Substantiation: The policy must state that all employee expenses must be substantiated within a reasonable period of time. The IRS suggests a window of 60 days for employees to substantiate their claim (i.e. submit their expense report for the expenses in question)
3. Return Of Funds: The policy must state that any excess reimbursements or allowances be returned to the employer. The IRS gives an example timeline of 120 days – this is deemed acceptable. Essentially, the policy needs to make it clear that any extra allowance/reimbursement received by the employee will be returned to the employer within 120 days.
Here’s a sample Employer Expense Reimbursement Plan that meets IRS requirements.
Are Reimbursements Taxable?
The short answer is no.
You may be able to deduct the same types of business expenses that qualify for reimbursement, but only if your employer has not reimbursed you for them!
This is the key, and a lot of people are confused on this.
If you incurred expenses and were reimbursed for them by your employer you can’t expense them on your personal tax return.
As an example:
If you drove 245 miles roundtrip for a business meeting and your employer reimbursed you according to the 2018 Standard Mileage Rate of $0.545/mile for a total of $133.53 then you would not be allowed to deduct any of this business mileage expense on your tax return as it was previously reimbursed.
Are Reimbursements Counted As Income?
As stated above in #3 Return Of Funds as long as the employee returns the reimbursement or allowance in excess of the total expense amount it won’t be counted as income.
Can You Deduct Employee Expenses On Your Tax Return?
You can only deduct expenses that were not reimbursed, and again, these expenses need to be acceptable expenses and itemized with proof. Most employers reimburse expenses and should have a policy and process in place to do so.
According to the IRS:
If your employer included reimbursements in box 1 of your Form W-2 and you meet all the rules for accountable plans, ask your employer for a corrected Form W-2.
If you attempt to deduct expenses that were previously reimbursed through your employer this is not legal. If you’re at all concerned about unpaid expenses, please reach out to HR or Accounting at your company and ask for clarification. In the event that you don’t receive a satisfactory answer consult with a tax professional.
How Employers Reimburse Employees
This was covered briefly in the IRS section above. In essence, if your employer reimburses expenses they will (or at least they should!) have an expense policy in place.
Without an expense policy that meets the IRS’s accountable plan requirements both you and your employer could have quite a headache on your hands depending on how the expenses were handled and if reimbursements were given.
Expense Reimbursement Report:
Most companies have specific requirements for filing expense reimbursement reports, in fact, most of you reading this post are aware of how your company files.
If not, typically there are 2 ways in which you can file reports.
1.) On paper: This is the most cumbersome way to both log and file reports. One of the reasons we have expense reporting as a feature in Everlance is to alleviate the hassle of manually tracking expenses by hand. Reporting is as simple as exporting your data and handing it off to the person that processes reimbursements!
Of course, where there’s paper there tends to be a paper process. Usually, a very specific process involving pre-printed forms. An example of an expense report that’s completely manual would be this Company Travel Expense Report.
As you can see they’re requesting a very specific way of itemizing expenses by category. It’s possible that some of you that just viewed this report have terrible flashbacks of spending hours of your off-work time trying to track down original copies of receipts and getting this expense report submitted by the deadline!
2.) Electronically: Admittedly, this process is still in its infancy. While it may be the 21st century, not all businesses have managed to ditch the paper requirements.
Every year cloud-based expense management products are getting better and more efficient. At Everlance we know the future is in streamlining this arduous process for both employers & employees.
Imagine a world where an employee could scan a receipt and it’s not only automatically stored in the cloud, but also filed in the appropriate area, under the appropriate category and delivered immediately or in batches for reimbursement review?
Or what about the ability to link a bank account or company credit card to the software and every transaction is automatically filtered just like the receipt above.
Employees that are stuck dealing with pen-and-paper expense reports would save hours of time. Reports would be accurate and delivered on time. The electronic process could save employers & state agencies hundreds of thousands of dollars in employee expense & reimbursement management.
Many employers choose to reimburse employee expenses through a process called payroll reimbursement, which as you can guess means the employers is reimbursed through their paycheck.
Within your companies payroll software, there is typically a feature that allows them to create a non-taxable reimbursement payroll item. This item allows the company to pay the employee any reimbursements due without the payment affecting net taxes.
This step is incredibly important because if this isn’t treated as a non-taxable reimbursement payroll item then guess what? You might be paying taxes on it!
If you have any concerns regarding reimbursements via payroll, please speak with your employer’s HR or Accounting division to ensure that any expenses are treated as non-taxable items if issued via payroll.
Is There A Time Limit On Reimbursement?
This is going to be at the discretion of your employer and firmly outlined in the employer expense plan. As stated above in the IRS section, you should be issuing your expense report within 60 days of the expense.
So, there may be a time limit of 60 days to issue reimbursement, however, there is no time limit in which you must be paid by your employer.
Can Employers Refuse Reimbursement?
Absolutely! If the employer has an expense plan in place and your expense in question falls outside an ordinary or typical expense the employer can deny your reimbursement claim.
There are laws in place to protect employees, however, they’re there to protect them from expenses that are deemed ordinary, necessary & typical.
If your employer has an expense plan in place and it allows for reimbursement of travel or accommodations there will likely be a ceiling, i.e. a limit to how much you can spend.
If you were to choose to fly first class to your destination it would not be the employer’s responsibility to reimburse your for the cost above their limit for airfare (if one is in place) and if there isn’t a specific price limit in place the employer can still refuse to pay the extra amount.
Here’s an explanation.
California Division of Labor Standards Enforcement (“DLSE”) has said the employer may impose reasonable limits on employee expenses.
What does this mean? It means that when questioned the DLSE in California stated that employers may impose reasonable limits on employee expenses. Even if there’s no limit listed, a limit can be used.
Does this mean reasonable is defined? Not necessarily. You could probably argue it all day since it could feel so subjective. What you feel is reasonable may not be to your employer, just remember that the employer may have the upper hand here in regards to the law especially if there is an expense limit listed in their plan.
If you’re truly concerned about an employer not reimbursing an expense you should speak to an attorney that specializes in labor laws to see if you have recourse.
Expenses are a necessary part of many employees lives. While the process for reporting can be different from employer-to-employer, the end result is that there is typically an employee reimbursement process in place for expenses paid for or incurred by the employee during the course of business.
For those of you that are looking into making your company expense tracking & reporting a little bit easier, we’d like to suggest Everlance.
Everlance is an iOS & Android app that automatically tracks mileage, expenses & revenue. In the case of employee expenses, this means that you could not only track any business mileage incurred during the trip but your expenses as well. You can manually add hotels, parking, meals, entertainment – all of it.
Even better? If you’re required to keep receipts (typically you are!) then you can take a picture of your receipt with your smartphone and an image of the receipt is automatically stored in the cloud for as long as you need it. Unlike some of our competitors, there is no limit to how many receipts you store.
When you’re done with your trip you can export your data in one easy-to-read report and hand it off to the person in charge of processing expense reports.
And that doesn’t even cover the power of the app for personal taxes! Everlance is a fantastic way to track moving & charity-based mileage or adding up small business expenses.
You can download Everlance for free and try all of the features of Everlance Premium for 7 days. After 7 days you can still use Everlance free for as long as you want, but you’ll have to upgrade to Everlance Premium ($8/mo or $60/yr) to retain all of the features.
For those of you that own businesses and would like an easier way to track employee mileage and expenses, we have Everlance Teams that has all of our awesome features plus a dashboard and simplified billing for as many employees as you’d like.