Reimbursements are a way to pay an employee back after that employee spent their own money on business expenses.
Two examples of these expenses include:
- Travel costs including flights, car rentals, lodging, and meals.
- The costs of office supplies.
Are reimbursements taxable to the employee?
In general, reimbursements are not taxable to the employee because you’re simply paying back them back for money they spent on company-related expenses.
It’s often best to set up an “accountable plan,” as described below, so that the expense can be treated as a non-taxable reimbursement.
How do I set up an accountable plan for reimbursements?
To have up an accountable plan for reimbursements, you need to set up a process by which you:
- Make sure the expense that was incurred was for a business reason. Personal expenses, such as a gift for a family member purchased while on a business trip, do not apply.
- Receive proof, typically in the form of a receipt, that the expense was incurred. This proof must be received within a reasonable period after the money was spent.
- Are paid back any amount of money you gave to the employee for expenses which they did not spend.
Can I deduct the amount I reimburse employees from my taxes?
That really depends on whether the item you’re reimbursing was a deductible business expense under the IRS’ rules.
Make sure to check this IRS document, as well as an experienced tax advisor, to make sure before you deduct.