Have you ever fronted the bill for a business lunch, travel expenses, or office supplies? If you’re an employee, chances are you have. Employee expense reimbursements are a common practice, but navigating the process can sometimes feel like a maze.
This blog aims to shed light on everything you need to know about employee expense reimbursements, from understanding what gets reimbursed to building a smoother system for both employees and businesses.
Employee expense reimbursements are essentially a way for companies to repay employees for business-related costs they incur out of pocket. This can include a variety of expenses, depending on company policy.
Businesses reimburse employees for a variety of work-related expenses. Here’s a breakdown of the most common categories:
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Expenses related to client lunches, dinners, or other business related entertainment may be reimbursed, often with spending limits. These meals must have a clear business purpose, such as building relationships with clients or potential partners.
If you regularly purchase office supplies for your work (printer, ink, notepads, etc.) you might be able to get reimbursed for these costs. Some companies may have a spending limit or require receipts for larger purchases.
Companies may reimburse the cost of conferences, workshops, or other professional development opportunities relevant to your job. This can help employees up–to-date on industry trends and enhance their skills.
With the rise of remote work, some companies reimburse a portion of internet bills, phone bills, ergonomic furniture for your home office. These reimbursements may be based on a specific percentage of the total cost of a fixed monthly allowance.
It’s important to note that some companies offer health insurance that incorporate employee expenses reimbursements. Here are a few examples:
This type of Health Reimbursement Arrangement allows employers to contribute tax-deductible funds to an account that employees can use to pay for qualified medical expenses not covered by their insurance plan.
Is your small business eligible to offer a QSEHRA?
To set up a QSEHRA, your business typically needs to meet these criteria:
Source: HealthCare.Gov
Similar to a QSEHRA, but designed for companies with fewer employees who don't offer group health insurance plans.
This HRA can be used in conjunction with a traditional employer-sponsored group health plan. Employees can use pre-tax dollars contributed by their employer and themselves to cover qualified medical expenses.
Some companies provide employees with stipends to cover various work-related expenses. These can be categorized as follows:
Important Note
This list provides a general overview, and specific policies will vary depending on the company. Always be sure to consult your company's expense reimbursement policy for details on what is and is not reimbursable.
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Generally, legitimate business expense reimbursements from your employer are not considered taxable income. However, there are a few things to keep in mind:
Not all employee expenses are created equal. While some business expenses are simply reimbursed by the company, others can offer a tax advantage for both the business and the employee. For a business expenses to be considered tax-deductible to the company and for employees to receive tax-free reimbursements, it must fall under the definition of an accountable plan.
Think of an accountable plan as a set of guidelines established by the IRS to ensure reimbursements are legitimate business expenses. To qualify as an accountable plan, your reimbursement arrangement must meet the following criteria:
The plan can only reimburse employees for legitimate business expenses they incur while performing their job duties.
Employees must provide detailed receipts or expense reports within a reasonable timeframe (typically 60 days) to substantiate their expenses. These records should clearly show the date, time, place, amount spent, and the business purpose of the expense.
If an employee receives a fixed allowance for expenses and spends less than the allocated amount, they must return the unused portion to the company within a reasonable time frame.
Following these guidelines offers significant advantages:
Key Points:
Source: IRS 26 CFR 1.62-2: Reimbursements and other expense allowance arrangements.
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A smooth and efficient expense reimbursement system benefits both employees and businesses. Here’s how to build a strategic framework:
Fyle goes beyond just automating employee reimbursements–it automates the entire process, saving you time and money. From submitting receipts to ensuring compliance, Fyle streamlines expense reimbursements from start to finish. Let's see how it works: