The Tax Consequences of Employee Reimbursements

August 08, 2018

Employee reimbursements may be considered taxable income unless the three requirements of an accountable plan are met.

Employee expense reimbursement is a common issue for employers. Often the question arises, “Should these reimbursements be considered taxable income to the employee?” That depends.

Reimbursements are not considered taxable income if they meet the requirements of an accountable plan. An accountable plan requires that:

  • The expense incurred is connected to business activities.
  • The employee provides substantiation for the expense (such as a receipt).
  • The employee returns any money in excess of substantiated expenses.

Reimbursements are considered taxable income if they do not meet the above three requirements, thus falling under what’s called a nonaccountable plan. For example, if you withhold a flat allowance each month for vehicles – and don’t require substantiation or return of excess funds – the entire amount is considered taxable to the employee.

PaySmart recommends discussing the tax consequences of employee reimbursements with your accountant to be sure specific situations are being handled appropriately.