Expense Reimbursements in the US: A Guide for Employers

When employees incur business expenses while working for their employer, they will naturally expect reimbursement of personal funds.  What they and their employer may not realize is that some reimbursements are actually taxable to the employee, if there is some type of non-business or income component to the expense payment.

In the US, employers are not required by federal law to reimburse employees for expenses, but it is customary to do so, and some states do require it.  Either way, most employees would not accept paying an employer’s business expenses out of pocket.  This guide will explain how reimbursements will be viewed by the IRS for tax purposes, so that your employees will know what to expect.

What types of expenses are reimbursable in the US?

There are two categories of employee expenses that may be reimbursed: taxable and non-taxable.  When a reimbursement is taxable, the amount is included in income on the monthly payroll for tax withholding.

Taxable expense reimbursement

• Personal use mileage with a company-provided car
• Performance related prizes or trips
• Legal or accounting services

Non-taxable expense reimbursements

• Business travel: meals, rental car, accommodation, miscellaneous expenses
• Laptop/PC for work use
• Cell phone/plans for work use
• Educational reimbursements ($5250 per year)
• Health and life insurance policies
• Fringe benefits up to $265 per month (parking, transit passes, etc.)
• Non-commuting mileage for business purpose with a personal car (56 cents per mile)

What is an Accountable Plan?

An accountable plan in the US allows an employer to set an expense reimbursement policy that meets IRS criteria.  This ensures that all qualified employee expenses can be reimbursed tax free, without any dispute or delay.  If you are running a US payroll DIY it is important to have an accountable plan in place, or you can use a US employer of record that is compliant.

The accountable plan for expenses must meet three conditions:

• Business connection: expenses incurred while performing services for the employer
• Substantiation: evidence of time, amount, place and purpose of the expense
• Returning excess amounts: return of any unspent expense allowances paid to the employee

Client Case: Reimbursing expenses out of payroll cycle for US employee

We had a client with an employee in the US that needed a $10,000 expense reimbursement, and due to the amount did not want to wait until the next payroll cycle.  The client also wanted to set up an advance payment to avoid this situation in the future and facilitate expense reimbursements quickly.

We offered to make an out of cycle payment for the $10,000 which would be available within a week, and then we set up an expense bond for future reimbursements.  The bond was an amount the client provided based on normal expense parameters.  As expenses were incurred, Shield GEO would reimburse the employee from the bond.

Do you need more information about the US?

If you are new to employing in the US, you might have other questions such as:

Are non-taxable expense reimbursements included in the payslip, or in a separate payment?

Are employees required to document the use of cell phones and laptops to ensure they are for business only?

Does the IRS require that an employer send them a copy or verification of their accountable plan?

 Our clients face these types of issues frequently, and turn to us for advice and guidance to remain compliant when running a US payroll.  We make international employment simple.

The information in this article is subject to changes in local legislation.