Federal and State Reimbursement Laws for Remote Employees

Kim Porter

Remote work has become the new normal for many companies in America. More than a third of new businesses hired fully remote employees in 2023, and the percentage of remote employees in the workforce recently hit 15.8%.

Remote work can boost your bottom line because it generally reduces turnover, lowers (or eliminates) real estate costs, and allows you to hire the most qualified candidates. But you may need to factor in the costs of reimbursing your employees for expenses they incur through the work-from-home (WFH) arrangement—and understanding the compliance requirements regarding reimbursements is crucial. 

Who’s considered a remote employee?

Remote employees are workers who do their jobs from a location other than an employer’s office you run. These employees may incur extra costs—such as internet service and home office equipment—when doing their jobs remotely. You’re not required to reimburse expenses if an employee chooses remote work. But if you require remote work, then you’ll need to follow reimbursement guidelines for the state where your employee works. 

What counts as a necessary cost?

In states that have specific reimbursement laws, businesses typically pay employees for expenses related to doing their job. So the list of expenses may vary with each industry, company, and role. 

Here are some examples of reasonable expenses that remote workers might incur and you may need to reimburse:

  • Internet services
  • Computers, monitors, keyboards, and mouse devices
  • Equipment such as copiers and printers
  • A portion of the employee’s cellphone bill or the phone itself
  • Home office equipment

Laws for reimbursing remote employees

The rules on remote worker reimbursement vary on the federal, state,e and local level, so it’s important for you to stay up to date on your state’s remote employee reimbursement policies.

Federal law on employee reimbursement

There’s no federal law that requires you to reimburse employees for work-related expenses. But under the Fair Labor Standards Act, you’ll need to reimburse employees if those work-related expenses cause their earnings to dip below the federal minimum wage.

State laws on employee reimbursement 

A handful of states and the District of Columbia have laws that require employers to reimburse remote workers for certain expenses. Here’s an overview of those laws by state:

StateSummary of what employers must reimburse
CaliforniaEmployers must reimburse employees for necessary expenses required to perform the employee’s job duties or incurred at the employer’s request. 
District of ColumbiaEmployers must reimburse employees for the costs of purchasing and maintaining all necessary tools required to perform the job.
IllinoisEmployers must reimburse employees for all necessary expenses or losses that are related to the employee’s job. Employees must submit documentation to request the reimbursement within 30 days, unless the employer’s rules state otherwise. 
Iowa (PDF)Employers must reimburse any expenses they authorize. If the employee isn’t reimbursed within 30 days of submitting a request, the employer must provide a written notice with an explanation.
MassachusettsWork-related expenses may not reduce an employee’s earnings below the current state minimum wage, which is $15/hour in 2024. 
Additionally, the Massachusetts State Attorney’s office recommends that employers reimburse employees for expenses that are “unavoidable and necessary” to do their job.
MinnesotaWhen an employee leaves the company, the employer must reimburse them for expenses listed in the statute. Those expenses include uniforms, purchased or rented equipment, travel expenses for employment, and consumable supplies.
MontanaEmployers must reimburse employees for all expenses necessary for the employee to do their job or incurred at the employer’s request.
New HampshireEmployers must reimburse employees for expenses connected to the employee’s job and made at the employer’s request. The employer must reimburse these costs within 30 days of receiving the request.
New YorkIf an employer agrees to pay for specific benefits and expenses, it must provide reimbursement within 30 days.
North DakotaEmployers must reimburse employees for all necessary expenses or losses related to their job or incurred at the employer’s request.
PennsylvaniaExpense reimbursements are considered fringe benefits. If an employer agrees to pay for these expenses, it must provide reimbursement within 60 days of the employee’s claim submission.
South DakotaAn employer must reimburse an employee for all expenses and losses related to the employee’s job or incurred at the employer’s request.

Because laws can change, it’s always a good idea to work with an employment attorney to establish, review, and update reimbursement policies as needed. Remember to check if there are rules on the local level, too. For instance, Seattle employers must reimburse workers for expenses incurred on a regular basis.

How to set up reimbursement policy guidelines

Creating a reimbursement policy can help avoid confusion throughout your company and manage expectations among employees. It should include details like:

  • Expenses that are eligible for reimbursement.
  • The maximum amount you’ll reimburse for each expense.
  • How you’ll pay the reimbursements, such as a stipend added to the employee’s paycheck each month.  
  • How employees can request additional reimbursement. 
  • How you’ll handle reimbursements you failed to pay. 

You’ll also need to determine if your company has an accountable or nonaccountable reimbursement plan. It’s perfectly acceptable to use either type, as long as you stick to just one. 

Accountable plan

An accountable plan is a reimbursement arrangement that requires employees to document their expenses. This type of plan is beneficial because the reimbursements aren’t considered wages. So you (and the employee) won’t have to pay payroll taxes or income taxes on the amounts, and you can deduct them as business expenses.

To qualify for an accountable plan, your reimbursement arrangement must follow all three of these rules:

  1. The expense must be ordinary and necessary to your business, and the employee must incur it while performing services for your company.
  2. Your employee must also substantiate the expense, which is usually done with a receipt that shows the date, place, and amount. The employee should also include the purpose of the expense and submit the report within a reasonable time frame.
  3. The employee must return any excess amount paid to them within a reasonable time. 

Nonaccountable plan

With a nonaccountable plan, the IRS treats any reimbursements or advances you provide as supplemental wages, which are subject to payroll and income taxes. You still may be able to deduct them as business expenses. 

Reimbursements are considered nonaccountable if:

  1. Your employee doesn’t properly document their expenses in a reasonable time frame.
  2. The employee doesn’t return any excess advances you give them.
  3. You give the employee an allowance regardless of whether you expect them to incur expenses. 
  4. The money would have otherwise been paid to the employee as wages.

Next steps

If any of your employees are working outside the office, it’s a good idea to create a remote work policy (if you haven’t already). Include details on how you’ll reimburse expenses for any costs those employees incur. You can add the remote work policy and the reimbursement details to your employee handbook

Kim Porter Kim Porter covers personal finance topics for AARP The Magazine, Bankrate, U.S. News & World Report, Reviewed, Credit Karma, and more. When she’s not writing, you can find her training for her next race, reading, or planning her next big trip. Twitter | LinkedIn
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