Steve Shapiro, EA CTRC

Remote Employee Reimbursements and Taxes: Choose Your Path

Your team is working remotely and inevitably faced with various expenses like internet bills, home office equipment, and possibly additional phone costs. As a conscientious employer, you aim to ease these financial burdens by reimbursing them. However, the method you choose to handle these reimbursements can have significant implications.

The Reimbursement Dilemma: Taxable or Tax-Free?

Essentially, there are two primary approaches:

Option 1: The "Straightforward" Approach — Taxable Reimbursements

Opt for simplicity by disbursing a fixed monthly stipend, like a $150 remote work allowance, through your payroll system. It’s transparent and predictable for everyone involved. However, this is regarded as taxable income.

Key consequences include:

  • You incur payroll taxes.

  • Your employees are taxed on their income.

  • The amounts are reported on their W-2 forms alongside their salaries.

While this method is undeniably convenient, it can be financially inefficient. The $150 you provide is reduced to approximately $100 after taxes. Image 3

Option 2: The "Advanced" Strategy — IRS-Compliant Accountable Plans

Alternatively, consider implementing an accountable plan to facilitate tax-free reimbursements.

Benefits of this approach include:

  • No payroll taxes
  • No income taxes
  • Exclusion from W-2 reporting requirements

Your business can still claim the expense as a deduction while employees receive the full amount.

The caveat? Documentation is essential. Employees must provide receipts, logs, or statements, and any advance payments not used must be reimbursed. Implementing this does involve a process—though it's less daunting than it seems. Learn more about IRS Accountable Plans. Image 2

Determining the Best Route for Your Business

Ultimately, your decision hinges on the specifics of your team and your willingness to handle additional administrative tasks.

  • If you prefer to avoid receipt management: Opting for a taxable stipend may be the most straightforward route.
  • If maximizing employees' financial benefit and minimizing tax expenses is paramount: An accountable plan could be worth the setup effort.

Remember: In some states, such as California, it's mandatory to reimburse necessary business expenses. Not adhering to a formal plan isn't just a missed benefit; it poses a compliance risk.

Pro Tip: Customize Reimbursement Tiers

Different roles within your organization may necessitate varying levels of support. Consider implementing a tiered reimbursement system:

  • Basic Tier: Covers essentials like internet and phone.
  • Intermediate Tier: Includes additional office equipment.
  • Executive Tier: Accounts for travel, tools, and more.

As long as expenses are business-related and appropriately documented (if using an accountable plan), the IRS approves. Image 1

The Conclusion

There are two viable paths: one offers simplicity but incurs taxes, while the other provides complexity but keeps finances tax-free. The choice depends on your operational preferences.

The critical factor? Addressing this issue promptly. As remote working becomes the norm, your reimbursement strategy could either accrue unnecessary tax expenses or result in significant financial savings for your organization and your team.

Take Action

Our expertise can help you determine the appropriate reimbursement strategy for your business—whether it involves establishing an accountable plan or streamlining a taxable stipend. Contact us today and let us simplify this process for you.

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