Eventually, almost every employer will need to reimburse an employee for a business expense — whether it’s travel to a client meeting, tools for the job, or professional training. While paying an employee back sounds simple, there’s one key compliance challenge: Do you need to withhold payroll taxes on that reimbursement?
In this guide, we’ll break down what expense reimbursements are, how the IRS treats them for tax purposes, and what small businesses should know to stay compliant.
What Is an Expense Reimbursement?
An expense reimbursement is when an employer pays an employee back for out-of-pocket costs they incurred while performing their job.
Common examples include:
- Office supplies
- Business travel and lodging
- Meals and entertainment related to work
- Business use of a personal vehicle (mileage and tolls)
- Tools and uniforms
- Education and training expenses
- Wellness stipends
Should businesses have an expense management policy?
Even the smallest businesses should have an expense management policy. This reduces fraud, keeps reimbursements consistent, and ensures tax compliance. A good policy — ideally outlined in your employee handbook — should define:
- Which expenses are reimbursable.
- Documentation required (e.g., receipts, mileage logs).
- How to submit a reimbursement request.
- Timelines for submission and payment.
The IRS and FLSA View on Reimbursements
While the Fair Labor Standards Act (FLSA) does not require employers to reimburse for every expense, it does require reimbursement if:
- The expense is necessary for the employee to perform their job; and
- Paying that expense out-of-pocket would bring a non-exempt employee’s pay below the federal (or state) minimum wage.
In Maine, where the state minimum wage is higher than the federal minimum, this is especially important to track.
Are Expense Reimbursements Taxable?
According to IRS reporting requirements, some business expenses are classified as taxable, and others are considered non-taxable. Generally, businesses categorize expenses into two categories in order to separate taxable expenses from non-taxable expenses. These categories are:
- Accountable plan expenses
- Non-accountable plan expenses
Accountable Plan Expenses
If your reimbursement plan meets IRS “accountable plan” rules, the payment is not considered taxable income. To qualify:
- The expense must have a business connection.
- The employee must substantiate the expense with receipts, logs, or other documentation (usually within 60 days).
- Any excess advance must be returned within a reasonable time (usually 120 days).
Examples of typically non-taxable reimbursable expenses:
- Office supplies
- Education & training
- Mileage & tolls (up to IRS standard mileage rate)
- Business meals (within IRS guidelines)
- Business travel (lodging, airfare, per diem)
- Required tools & uniforms
- Student loan/educational assistance (under Section 127 plan – up to $5,250/year)
- Parking stipends (up to $300/month in 2025 under qualified plan limits)
- Business-use cell phone stipend
Tip: Each category has specific IRS rules. For example, a cell phone stipend is non-taxable only if the phone is needed for business purposes.
Many of the above expenses have specific guidelines to follow or documentation that is required to be considered non-taxable. Consult your payroll provider or appropriate resources with any questions.
Non-Accountable Plan Expenses
If your plan does not meet the accountable plan rules, reimbursements become taxable wages. That means you must:
- Withhold federal and state income tax and FICA.
- Include the amount when calculating FUTA and SUTA.
Common taxable reimbursements:
- Vehicle allowance (flat rate without substantiation)
- Personal use of a company car
- Health insurance stipend without an HRA (illegal under ACA)
- Gym/wellness allowance for personal use
- Home office stipend (if not documented and business-related)
- Gift cards given to employees
What About Non-Reimbursable Expenses?
Not all expenses qualify for reimbursement under most company policies. Examples often excluded:
- Personal expenses (clothing, grooming, unless job-required)
- Commuting costs
- Meals not related to business purposes
- Relocation costs (unless agreed in advance)
Best Practices for Expense Management
- Use a written policy — Define allowable expenses, documentation, timelines, and approval process.
- Require substantiation — Receipts, mileage logs, or per diem guidelines.
- Automate where possible — Expense tracking tools save time and reduce errors.
- Keep good records — For both compliance and potential audits.
- Review regularly — Adjust policy for IRS limit changes and state law updates.
Taxable Expense FAQs
Are reimbursed travel expenses taxable?
Not if they meet accountable plan rules and are properly documented.
Can I reimburse a home office stipend tax-free?
Only if it’s directly related to business use and supported by documentation. Otherwise, it’s taxable.
How quickly should I pay reimbursements?
Best practice is within one pay cycle after submission, but your policy should set a clear timeline.
Are tips or gratuities reimbursable?
Only if they are part of a documented business meal or service and approved under your policy.
Can unreimbursed employee expenses be deducted on taxes?
Generally no for most employees, except for specific categories like Armed Forces reservists or qualified performing artists (see IRS Pub. 529).