An Employers Guide to Tax-Free Employee Reimbursements & Benefits: Tips and Tricks
As a small business, chances are you’re always looking for ways to give back to your employees. Almost all small business employees could go somewhere else and make more money, but we don't do it for the money. We truly love what we're doing and they don't want to be a part of big corporations.
If you’re looking for ways to give back to your team utilizing tax-advantageous methods to compensate your team without hurting cash flow. Keep reading!
Understanding how to utilize tax-free methods can offer significant benefits for both your business and your employees. We’ll explore various strategies and tips to help you navigate the complexities of employee reimbursements while ensuring compliance.
What’s in Store?
· What are Employee Reimbursements?
· Why Understanding Employee Reimbursement Laws is Essential for Employers
· Accountable Plan for Business Expense Reimbursement
· How to Set Up and Track an Accountable Plan
· List of Expenses That Can Be Reimbursable To Employee Under the Accountable Plan
· How These Employee Reimbursements Work
· Additional Tips for Employee Reimbursement
· How We Implemented Our Employee Reimbursement Program at Money Mastery
· Bonus freebie: Access to Our Employee Home Office Reimbursement Calculator!
What are Employee Reimbursements?
Employee reimbursements are financial methods where business owners can compensate their employees without triggering income or payroll taxes. This approach allows businesses to provide financial benefits to their team while avoiding additional tax liabilities for both the employees and the company.
For employers looking to enhance their team’s compensation without straining cash flow, employee reimbursements offer a practical solution to show appreciation and potentially reclassify bonuses in a tax-advantageous manner.
Example: Suppose an employee spends $50 at an office supply store using their own money. If the business reimburses the employee that $50, it is not subject to tax because it's considered a reimbursement for a business expense. The $50 is refunded to the employee, who does not have to pay taxes on it, and the business can deduct it as a business expense rather than as taxable wages.
Why Understanding Employee Reimbursement Laws is Essential for Small Business Owners
For small business owners, navigating the complexities of employee reimbursements is crucial. Understanding the legal framework helps avoid potential pitfalls and ensures fair practices.
In recent years, notable companies like Wells Fargo, Liberty Mutual Insurance, Visa, and many others faced lawsuits over unreimbursed work costs. Similarly, Amazon was sued by California workers in 2022 and 2023 for unpaid expenses. These high-profile cases highlight the importance of understanding and implementing proper reimbursement practices.
While federal law doesn’t mandate reimbursement for all work expenses, the Fair Labor Standards Act (FLSA) requires employers to cover expenses if they cause an employee’s earnings to fall below the federal minimum wage ($7.25 per hour for hourly employees and $684 per week for salaried employees).
Similarly, the Americans with Disabilities Act (ADA) might necessitate reimbursement if an employee’s home office is a reasonable accommodation.
Federal guidelines on work expenses are limited, but some states have specific laws requiring reimbursement for necessary work-related expenses.
For small business owners, staying informed about these regulations is essential to ensure compliance and avoid costly disputes.
By integrating these principles into your reimbursement practices, you not only adhere to legal requirements but also provide tax-advantageous benefits to your employees. This approach enhances employee satisfaction while maintaining financial efficiency for your business.
Accountable Plan for Business Expense Reimbursement
An accountable plan is a reimbursement method that allows businesses to cover employee expenses as long as proper documentation is provided.
Under this plan, employees must submit proof of their expenses to receive reimbursement. This approach ensures that reimbursements are directly tied to actual business costs and helps maintain compliance with tax regulations.
Implementing an accountable plan helps ensure that all reimbursements are handled efficiently and in compliance with relevant regulations, making it easier for both employers and employees to manage business expenses.
Download the Expense Reimbursement Accountable Plan
How to Set Up and Track an Accountable Plan
Establish Clear Guidelines: Define what expenses are eligible for reimbursement and communicate these guidelines to employees.
Require Proof of Expense: Employees must submit actual bills, receipts, or an itemized list of expenses along with supporting documentation. The responsibility for maintaining and providing this documentation lies with the employee.
Use Tracking Tools: Utilize tools like spreadsheets or accounting software to track and manage reimbursements. Employees can submit their expenses through an Excel list or similar documentation.
List of Reimbursable Expenses Under an Accountable Plan:
Office and administrative supplies
Materials and supplies
Subscriptions and periodicals
Cellphones and pagers
Internet/online expenses for business purposes
Business-related books, tapes, and media
Local meals for business
Entertainment costs for business
Meals while out of town for business or education
Gifts to prospects and clients
Educational expenses to maintain, improve, and enhance skills
Seminars, conferences, registration fees, and related expenses
Equipment, including computers and office furnishings
Hotel costs or per diem rates for business travel
Travel expenses such as airfare, taxi, rental cars, etc.
Parking fees and tools for business-related purposes
How Employee Reimbursements Work
Setting up an employee reimbursement system involves establishing a benefit allowance that fits your organization's needs. You can determine a schedule for these allowances and decide whether to provide the same amount to all employees or offer varying amounts based on employee classes (such as full-time) or locations (such as different states).
Employees can then request reimbursement for their business-related expenses. You will approve these requests up to the predetermined allowance amount. Reimbursement payments are typically processed with the employee's next paycheck.
It's important to note that if you offer stipends for work expenses, these amounts are considered taxable income. Therefore, you must report them on employees' W-2 forms for their income tax purposes.
Additional Tips for Employee Reimbursement
To effectively manage expense reimbursements, it’s beneficial to create a written policy for your organization. This policy should clearly outline what expenses are eligible for reimbursement, incorporating any legal requirements you must adhere to.
Although expense reimbursement policies are not legally mandated, having one in place can help maintain consistency and transparency. It allows employees to understand in advance which expenses are covered, reducing confusion and ensuring that all parties are on the same page so employees can manage their expenses accordingly..
How We Implemented It
At Money Mastery, we believe in leading by example and practicing what we preach.
Since we are fully remote, we created an In-Home Office Calculator and use it to give back to our team and showing appreciation for their hard work by helping cover the team’s home office expenses. This tool helps us manage and track reimbursements, ensuring that every eligible expense is covered.
Including the entire team in this reimbursement process not only reflects our dedication to fair compensation but also fosters a sense of respect within the organization. We view these reimbursements not just as a policy but as a way to support our team’s needs and enhance their work environment and culture.
Our approach to employee reimbursements is a testament to our core values. By practicing what we preach, we ensure that our team members receive the recognition and support they deserve, reinforcing the trust and commitment that drive our company’s success.
Download Our Employee Home Office Reimbursement Calculator Here!
Implementing an employee reimbursement system can bring numerous benefits to your organization. By incorporating tax-free options, you not only ensure compliance but also enhance employee satisfaction and morale.
We try to take advantage of as many tax-free options as we can because it benefits our team and the business.
It's a win-win situation.
Offering benefits like a work stipend or other fringe benefits enhances employee satisfaction and helps you attract and retain top talent. This approach can give you a competitive edge in the market, setting you apart from organizations that do not provide such benefits.
By taking advantage of these tax-free ways to compensate your team, you create a positive work environment and demonstrate a strong commitment to your employees' well-being and professional growth.
To ensure your business's employee reimbursements are handled seamlessly, it’s essential to have a solid payroll system in place. At Money Mastery, one of our specialties is in payroll setup and payroll processing tailored specifically for businesses.
Our services streamline payroll operations, ensuring that reimbursements, deductions, and employee payments are processed accurately and efficiently. Whether you're just starting out or looking to optimize your current payroll systems, we’ve got the expertise to help you stay compliant and reduce administrative headaches.
Explore our Payroll Setup and Processing Services today!
Freebie: Steal Our Employee Reimbursements Program for Remote Businesses with Our Employee In-Home Office Calculator
This calculator is designed to simplify the process of reimbursing remote employees for their home office expenses.
With this tool, you can easily calculate and track eligible expenses, making it easier to support your team while optimizing your financial efficiency.
