Employee reimbursements should be straightforward: your employee spends money for the business and then you pay them back. But getting to a straightforward policy and process means navigating some concepts that might be new to you, like accountable plans, per diem, and "ordinary and necessary" expenses.
This guide breaks down how employee reimbursements work: what counts as a reimbursable expense, how to keep reimbursements tax-free, and how to set up a policy your team can follow.
What are employee reimbursements?
Let’s start with the basics. Employee reimbursements are how you pay an employee back after they've spent their own money on something the business needed. There are two ways to manage employee expense reimbursements:
Actual expense method: The employee covers the cost upfront, submits proof of what they spent, and you repay them exactly that amount.
Per diem: A per diem is used for business travel. You reimburse employees a fixed daily rate for meals, lodging, and incidentals. You can set your own per diem rate (i.e. $50/day for meals while traveling), or you can use the General Services Administration’s per diem rates by location. The IRS allows you to use them for tax-free reimbursement under an accountable plan. No receipts are required if employees stay within the rate.
A reimbursement isn’t compensation or income. It’s a repayment for money your employee already spent on your business's behalf. How you handle that distinction determines whether it will be taxed.
Expenses that qualify for employee reimbursements
To qualify for tax-free reimbursement, your employee’s expense must be "ordinary and necessary" for your business. Reimbursements can cover almost any expense with a legitimate business purpose that your employee paid for out of pocket. Common examples of business-related expenses include:
Business travel costs (flights, car rentals, lodging, and meals)
Office supplies and small equipment
Mileage for driving a personal vehicle for work
Remote work costs, like a portion of home internet or a work phone bill
Professional development, like a course or conference registration
A few categories never qualify, no matter your policy. Entertainment and recreation—such as gym memberships, concert tickets, or a round of golf—can't be reimbursed tax-free under IRS rules, even if the outing had a business purpose.
Beyond that, you can reimburse anything that's ordinary and necessary for your business.
What's an accountable plan, and how do I set one up?
An accountable plan is what keeps reimbursements tax-free for you and your employee. Without one, the IRS can treat the payment as taxable income instead, making it subject to payroll taxes.
Your accountable plan needs to meet three requirements:
Business connection. The expense has to serve a real business purpose. A hotel room for a work trip qualifies; a gift for a family member picked up on that same trip doesn't.
Substantiation. Your employee shows proof, typically a receipt, of what they spent and why. They should submit the expense report within 60 days of when the expense was paid or incurred. Having documentation also creates an audit trail you can point to if the IRS ever has questions.
Return of excess. If you advance an employee money and they spend less than that amount, they should return the difference within 120 days.
You don't need a formal legal document to set up an accountable plan. But you’ll also want to create a reimbursement policy to put the accountable plan into practice for your team.
How to create a reimbursement policy
An employee reimbursement policy is the document that tells employees what's covered under your expense policy. It explains things like how to submit a request, and when they'll get paid back.
Here's what to include in your policy:
Eligible expenses. List the types of expenses you'll reimburse. Be specific so that vague categories don’t lead to disputes. For example: travel (airfare), travel (mileage).
Reimbursement method. Explain what reimbursement method you will use (actual expense, per diem, or a mix). For example, you might use the standard IRS mileage rate to calculate mileage reimbursements while everything else uses actual cost.
Submission process. Pick a method (a form, spreadsheet, or expense software) for employees to submit their expense reports. Gusto's Expense Management software, available on Plus and Premium plans, handles this end to end: employees submit expenses, and once approved, the reimbursement is automatically added to their next paycheck as a separate, non-taxed line item.
Deadline. Set an internal deadline for submitting requests. Remember that the IRS wants expenses submitted within 60 days of the expense being occurred.
Approval step. Determine who will need to review and approve requests to confirm the expense is legitimate and matches the receipt.
Payment method and timing. Decide whether reimbursements go out via payroll, through accounts payable as a separate check, or another method entirely, and how quickly they're paid out after approval.
Return of excess. If you ever advance money for expenses, state how and when employees return unused funds.
Put your policy in writing, even if it's just one page, and share it with your team so that expectations are clear.
Am I legally required to reimburse employees for business expenses?
There's no federal law requiring you to reimburse employees for business expenses in most cases. The one exception is if unreimbursed costs would push an employee's pay below minimum wage, which the Fair Labor Standards Act (FLSA) doesn't allow.
But a growing number of states require reimbursement, regardless of wage level. For example, California law requires you to reimburse "necessary expenditures" incurred on the job.
Since state rules vary and change, confirm your specific obligations with an employment attorney or your state's labor department before finalizing your policy.
Once your policy is set, reimbursing employees shouldn't become another manual task on your list. See how Gusto supports reimbursements with automation, right alongside your regular payroll.
FAQs
Can I deduct the amount I reimburse employees from my taxes?
In most cases, yes. If the expense would have been deductible had your business paid for it directly, the reimbursement is deductible too. It comes back to the "ordinary and necessary" standard: a legitimate, common business expense that helped get the job done. Tax deductions depend on the specifics of the expense and your business structure, so check with a tax advisor before you file.
Are reimbursements taxable to the employee?
In general, no. Reimbursements aren't taxable to the employee because you're simply paying them back for money they spent on company-related expenses. However, that’s only true if you run the reimbursement through an accountable plan: the expense must be for a legitimate business reason, substantiated with a receipt within a reasonable time, with any unused amount returned.
What is a non-accountable plan?
A non-accountable plan is any reimbursement arrangement that fails one of the IRS's three accountable-plan requirements (business connection, substantiation, or returning excess funds). Because it fails that test, every reimbursement paid under it counts as taxable wages, regardless of whether the expense was genuinely business-related.
How do I calculate mileage reimbursement for employees?
There are two ways to calculate mileage reimbursement: the standard IRS mileage rate or the actual expense method. With the standard rate, multiply business miles by 72.5 cents per mile (on miles traveled through June 2026) or 76 cents after the mid-year fuel adjustment. The actual expense method totals real costs like gas and repairs, prorated by business use. It’s more paperwork, but it can give more back to the employee.
Should employee reimbursements go through payroll or be paid separately?
Both methods work, but either way, you should keep reimbursements as a separate line item from wages. This makes them easier to track as non-taxable. In Gusto, for example, you can add a reimbursement directly to a regular, off-cycle, or bonus payroll run. It’s paid out via direct deposit alongside wages but shows up as its own non-taxed line item, not compensation.
