Navigating Remote Employee Reimbursements & Taxes: Two Strategic Approaches

With the shift to remote work, many employees incur additional costs related to internet access, home office setup, and possibly increased phone usage. As a responsible employer, you may wish to mitigate these expenses by offering reimbursements.

However, the method of reimbursement can significantly impact your payroll and tax processes.

There are essentially two strategic approaches:

Strategy 1: The Simplified Approach — Taxable Reimbursements

Your solution might be a straightforward stipulation such as adding a $150 "remote work stipend" to your payroll each month. This way, both employer and employee know exactly what they’re dealing with.

However, these payments count as taxable income, meaning:

You incur payroll taxes.
The employee pays income tax on the stipend.
The amount will be reflected on the employee’s W-2 as salary.

While convenient, this approach can be costly. A $150 reimbursement might net the employee only about $100 after taxes.

Strategy 2: The Compliant Approach — Accountable Plans

The alternative is establishing an accountable plan, under which reimbursements are tax-free for employees.

This means:

No payroll taxes need to be paid.
Employees do not incur income tax.
Reimbursements are not reported on form W-2.

While the business can still deduct the expenses, employees receive the total amount reimbursed. The trade-off lies in the required documentation; employees must provide receipts or logs, and any advanced funds must be returned if not spent. Although this requires a systematic process, it significantly benefits both parties. Refer to IRS guidelines on Accountable Plans for more details.

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Deciding the Right Path

Your decision will hinge on your team's disposition and your willingness to handle administrative tasks.

Avoiding receipt collection? Opt for a straightforward taxable stipend.
Maximizing employee take-home pay? Consider instituting an accountable plan.

It’s crucial to note that certain states, like California, mandate reimbursement for necessary business expenses. Absence of a reimbursement plan could result in compliance issues.

Pro Tip: Customize Reimbursement Tiers

Not all roles demand the same reimbursement level. Structure your reimbursements in tiers:

Basic tier: Covers internet and phone expenses.
Intermediate tier: Includes office equipment.
Executive tier: Encompasses travel, specialized tools, and more.

As long as expenses are business-related, the IRS is generally satisfied with documented accountable plans.

Conclusion

Employers have two clear pathways: one is straightforward but taxable, while the other is meticulous yet tax-exempt. Both options can be effective depending on what aligns with your priorities.

The non-negotiable element? Deliberating your approach today. With remote work becoming more common, your reimbursement strategies could either increase tax liabilities unnecessarily or yield significant savings for both your business and employees.

Next Steps

Allow Haley Claypool & Associates to assist in determining the optimal reimbursement strategy for your organization, whether that involves setting up an accountable plan or managing a taxable stipend. Contact us and resolve your reimbursement concerns efficiently.

Have Questions?

Let's talk. We are here to help!

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