Are Reimbursements Really Taxable? Avoid this Mistake + FAQs
- March 24, 2025
- 7 min read
Reimbursements can be taxable or tax-free under U.S. tax law, depending on the situation.
According to a 2023 National Small Business Association survey, over 30% of small businesses mismanage expense reimbursements, risking costly IRS penalties and accidentally turning what should be tax-free payments into taxable income.
đĄ Tax-Free or Taxable? See which reimbursements the IRS expects you to report as income and which can stay off your tax return.
đď¸ Accountable vs. Non-Accountable Plans â the crucial IRS rules that decide whether an expense reimbursement ends up tax-free or taxed as extra wages.
đ State-by-State breakdown of how reimbursements are taxed across the US â find out which states follow federal rules and where you might face different tax treatments.
âď¸ Mileage, travel, home office, meals, education, relocation â a detailed look at every common reimbursement type and how to handle each without triggering unexpected taxes.
â ď¸ Real-life examples, common mistakes to avoid, and an expert FAQ to help you stay compliant and clear of IRS trouble when reimbursing expenses.
Taxable vs. Tax-Free: How the IRS Treats Expense Reimbursements
The IRS does not tax most business expense reimbursementsâas long as certain rules are followed. The key distinction lies in whether the reimbursement is made under an accountable plan or not.
Accountable Plans: Keeping Reimbursements Tax-Free
An accountable plan is the IRS-approved method for expense reimbursements to remain untaxed to the recipient. To qualify as an accountable plan, the IRS requires the following conditions be met:
Business purpose â The expense must have a business connection (it was paid or incurred while performing services as an employee for the employer).
Substantiation â The employee must timely document the expense with proof, such as receipts or expense reports, usually within 60 days of when the expense was incurred.
Return of excess â If an employee receives an advance or allowance, any amount in excess of actual expenses must be returned within a reasonable time (typically 120 days after the expense).
If these conditions are met, reimbursements are not counted as wages or income. The employer can deduct the expense, but the employee pays no tax on the reimbursement and nothing related to it shows up on their W-2.
Non-Accountable Plans: When Reimbursements Count as Income
If a reimbursement arrangement doesnât follow those rules, itâs considered ânon-accountable,â and these reimbursements must be treated as taxable income. For employees, that means adding the amount to W-2 wages and withholding income tax and payroll taxes (just like a salary or bonus).
Since 2018, employees also canât deduct these expenses on their personal tax return, so they truly lose out.
For example, a flat $300 monthly “expense stipend” paid without requiring any receipts would be treated as extra taxable salary under these rules.
Pros and Cons of Accountable vs. Non-Accountable Plans
| Plan Type | Pros (đ) | Cons (đ) |
|---|---|---|
| Accountable Plan | – Reimbursements are not taxable to employees (no income or payroll tax on them) – Employees get full value back, boosting morale – Employer saves on payroll taxes on reimbursed amounts | – Requires documentation and tracking of expenses – Employees must submit receipts within a reasonable time – If rules arenât followed, reimbursements become taxable retroactively |
| Non-Accountable Plan | – Simpler for employers (no need to collect receipts or monitor expenses) – Can provide a predictable allowance to employees | – Reimbursements are treated as taxable income to employees (reducing their net benefit) – Employer owes payroll taxes on those payments – Employees cannot deduct the expenses on their federal tax return (under current law) |
Employee vs. Contractor Reimbursements: Key Differences
The tax outcome can also depend on whether the person receiving the reimbursement is an employee or an independent contractor. For an employee, reimbursements under an accountable plan are simply excluded from wages, whereas non-accountable reimbursements are added to taxable wages (as discussed above).
An employee with taxable reimbursements has no way to deduct those expenses under current federal law, making proper handling critical.
For an independent contractor (or other self-employed worker), reimbursements donât get the same wage treatment, but they still affect taxable income. Often, when a client reimburses a contractor, the total amount (fees plus expense reimbursements) is reported on a Form 1099-NEC.
The contractor then reports the full amount as income but can deduct the business expenses on their Schedule C or business tax return. In effect, the reimbursement isnât taxed because the deduction offsets it.
If the payer chooses to exclude the reimbursed expense from the 1099 (by paying it separately with documentation), the contractor would simply not include that portion as income nor deduct it. Either way, the contractor only pays tax on the net profit.
The key difference is that contractors always have the ability to write off business expenses, while regular employees do not â so mismanaged reimbursements hurt employees more.
Travel, Meals, Mileage, Home Office: How Different Reimbursements Are Taxed
Now letâs examine specific types of reimbursements â each has its own rules and quirks. From travel expenses to home office costs, hereâs how each type is handled for tax purposes:
Travel Expenses (Airfare, Lodging)
Airfare, hotel bills, rental cars, and other travel costs for business trips are generally reimbursed tax-free. The employee needs to substantiate the business purpose (for example, attending a work conference or meeting clients) and provide receipts for these expenses.
Under an accountable plan, the companyâs reimbursement for a flight, hotel, or other travel expense doesnât count as income to the employee.
However, any portion of a trip that is personal (such as a vacation added on or a spouseâs plane ticket that isnât for a business purpose) cannot be reimbursed tax-free â if the company covers it, that amount would be treated as taxable compensation.
Meals and Per Diem Allowances
Daily allowances (per diem) for meals and incidental travel costs are handled under accountable plan rules as well. The IRS sets maximum per diem rates for travel to different cities; if the per diem given does not exceed the federal rate for the location and the trip has a legitimate business purpose, itâs not taxable to the employee.
Any amount above the IRS-approved per diem rate is considered excess and must be treated as taxable income. Business meal reimbursements (for example, a client dinner that an employee paid for and got reimbursed) are also not taxed to the employee when properly substantiated.
(The employer may only deduct 50% of business meal costs on its own tax return, but that limitation doesnât affect the employeeâs tax situation.)
Mileage Reimbursements (Vehicle Use)
Using a personal vehicle for work (beyond your normal commute) can be reimbursed tax-free up to the IRSâs standard mileage rate (67¢ per mile for business use in 2024). If an employer reimburses at or below that rate, the payment isnât taxable income.
Any amount paid above the standard rate is considered extra compensation and becomes taxable (the excess portion must be included on the employeeâs W-2).
Conversely, if the company pays less than the standard rate, the employee cannot deduct the difference on federal taxes under current law, effectively losing out on that portion; and any reimbursement for commuting miles (like from home to office) is always taxable since commuting isnât a business expense.
Home Office Expense Reimbursements
With the rise of remote work, many employees incur home office expenses (internet, phone, supplies, even a portion of rent or utilities). If an employer reimburses these costs under an accountable arrangement (for example, the employee submits a portion of their internet bill or receipts for a desk chair), the payment isnât taxable income.
But simply giving a flat âhome office stipendâ without requiring documentation makes it taxable compensation to the employee. In short, as long as the reimbursement is tied to actual work expenses and supported by documentation, employees wonât pay tax on their home office support.
(Some states, like California, even require employers to reimburse necessary work-from-home expenses, which makes proper tax treatment of these payments important for compliance.)
Education and Tuition Reimbursements
Education-related reimbursements have their own special rules. An employer can pay up to $5,250 per year for an employeeâs education (tuition, fees, books, etc.) tax-free under a qualified educational assistance program.
Anything above $5,250 in a year is generally taxable income to the employee, unless the courses are directly job-related and meet IRS criteria as a working-condition fringe benefit. For example, if a company reimburses $10,000 for an employeeâs MBA program in one year, the employee would likely have to treat $4,750 of that as taxable wages.
In contrast, if the education is strictly to maintain or improve skills in the employeeâs current job (say a required certification course or continuing education), such a reimbursement could be fully tax-free as well.
Relocation (Moving) Expense Reimbursements
Moving expense reimbursements have seen a major change in tax treatment. Under current federal law, any reimbursement (or direct payment) for moving costs is taxable to the employee. The Tax Cuts and Jobs Act of 2017 suspended the previous tax-free treatment of moving expenses from 2018 through 2025 (with an exception for active-duty military moves), so employers must include moving reimbursements in taxable wages. Many companies âgross-upâ these paymentsâadding extra money to cover the employeeâs taxesâso that the employee doesnât end up paying out of pocket for a company-required relocation. Keep in mind, a few states still allow moving expense deductions or exclusions, meaning a relocation reimbursement might be tax-free at the state level even though itâs taxed federally (see the state-by-state table below for specifics).
Other Expense Reimbursements (Phones, Supplies, etc.)
Other common reimbursements follow the same logic: if an expense is directly work-related and properly substantiated, the repayment isnât taxable income. This covers items like cell phone bills, professional membership dues, or job-specific supplies and equipment. For example, if an employee must use their personal cell phone for work, the employerâs reimbursement of that phone bill is tax-free (the IRS treats employer-required cell phones as a nontaxable working-condition fringe benefit). Similarly, reimbursing an employee for necessary tools, uniforms, or safety gear required for the job would not count as income. Conversely, if a company reimburses a cost that isnât clearly work-related (essentially a personal expense), that payment is treated as taxable compensation.
State-by-State Tax Rules for Reimbursements
At the state level, the tax treatment of expense reimbursements usually mirrors the federal rules, but there are some exceptions. In general, if a reimbursement isnât taxed federally (because it qualified under an accountable plan), states with income tax also wonât tax it. However, certain states have decoupled from specific federal provisions â particularly regarding moving expense exclusions and unreimbursed employee expense deductions. The table below outlines each stateâs stance on taxing reimbursements and any special rules:
| State | State Income Tax Treatment of Reimbursements |
|---|---|
| Alabama | Follows federal rules; also allows a deduction for unreimbursed employee expenses on the state return (decoupled from federal law). |
| Alaska | No state income tax (no taxation of wage reimbursements). |
| Arizona | Follows federal rules for accountable vs non-accountable plans; did not conform to the federal suspension of moving expense exclusion, so qualified moving expense reimbursements remain not taxable by the state. |
| Arkansas | Follows federal rules; additionally allows deduction for unreimbursed employee expenses and still excludes qualified moving expense reimbursements from state income. |
| California | Follows federal rules on accountable plans; still allows unreimbursed employee expense deductions and does not tax qualified moving expense reimbursements (state didnât conform to those TCJA changes). |
| Colorado | Conforms fully to federal tax law (no special state differences on reimbursements). |
| Connecticut | Follows federal rules; still allows exclusion of employer-paid moving expenses (qualified moving reimbursements are not taxed by the state). |
| Delaware | Follows federal rules; continues to exclude qualified moving expense reimbursements from taxable income at the state level. |
| Florida | No state income tax (so no state taxation of reimbursements). |
| Georgia | Conforms to federal rules (no state-specific exclusions; moving reimbursements are taxable, no unreimbursed expense deduction). |
| Hawaii | Follows federal accountable plan rules; allows state deduction for unreimbursed employee expenses and excludes qualified moving expense reimbursements from income. |
| Idaho | Follows federal rules; still allows exclusion of moving expense reimbursements (state did not adopt the federal change for moving expenses). |
| Illinois | Follows federal rules; continues to exclude employer-paid moving expense reimbursements from state taxable income. |
| Indiana | Follows federal rules; excludes qualified moving expense reimbursements at the state level under its static conformity (based on an earlier IRC). |
| Iowa | Follows federal rules; did not conform to the federal repeal of moving expense deductions, so moving expense reimbursements remain tax-free in Iowa. |
| Kansas | Conforms to federal rules (no state exclusions for moving or other expenses). |
| Kentucky | Follows federal rules; still treats qualified moving expense reimbursements as nontaxable for state purposes. |
| Louisiana | Follows federal rules; continues to exclude moving expense reimbursements from state taxable income. |
| Maine | Follows federal rules; allows exclusion of moving expense reimbursements (decoupled from federal on moving expenses). |
| Maryland | Follows federal rules; still excludes qualified moving expense reimbursements from taxable income. |
| Massachusetts | Conforms to federal rules (moving expense reimbursements are taxable; no state-level unreimbursed expense deduction). |
| Michigan | Conforms to federal rules (no special state treatment of reimbursements). |
| Minnesota | Follows federal accountable plan rules; allows deduction for unreimbursed employee expenses on state taxes and continues to exclude qualified moving reimbursements from income. |
| Mississippi | Follows federal rules; did not tax qualified moving reimbursements (state allows those exclusions). |
| Missouri | Follows federal rules; still excludes employer moving expense reimbursements from state income. |
| Montana | Follows federal rules; retains exclusion for qualified moving expense reimbursements at state level. |
| Nebraska | Follows federal rules; allows exclusion of moving expense reimbursements (state did not conform to TCJA on moving). |
| Nevada | No state income tax. |
| New Hampshire | No tax on W-2 income (no state income tax on wages or reimbursements). |
| New Jersey | Generally conforms to federal rules; however, New Jersey still allows qualified moving expense reimbursements to be excluded from state income (even though federally they are taxable). No deduction for unreimbursed expenses. |
| New Mexico | Follows federal rules; continues to exclude moving expense reimbursements from taxable income at the state level. |
| New York | Follows federal accountable plan rules; decoupled from federal on moving expenses (excludes qualified moving reimbursements from NY taxable income) and allows state deductions for unreimbursed employee business expenses. |
| North Carolina | Follows federal rules; excludes qualified moving expense reimbursements from state income (maintains moving expense deduction). |
| North Dakota | Follows federal rules; still allows exclusion of moving expense reimbursements. |
| Ohio | Conforms to federal rules (no special exclusions or deductions for reimbursements). |
| Oklahoma | Follows federal rules; did not adopt the federal change on moving expenses, so moving reimbursements remain tax-free at state level. |
| Oregon | Follows federal rules; continues to allow moving expense reimbursements to be excluded from state taxable income. |
| Pennsylvania | Pennsylvaniaâs flat income tax generally follows federal definitions of compensation. It has no special exclusion for moving reimbursements (they are taxed if included in wages), but it uniquely allows employees to deduct unreimbursed business expenses on the state return, which can offset taxed reimbursements. |
| Rhode Island | Follows federal rules; still excludes qualified moving expense reimbursements from state income. |
| South Carolina | Follows federal rules; maintains exclusion for moving expense reimbursements at the state level. |
| South Dakota | No state income tax. |
| Tennessee | No state income tax on wages. |
| Texas | No state income tax. |
| Utah | Conforms to federal rules (no special state provisions for reimbursements). |
| Vermont | Follows federal rules; did not conform to the elimination of moving expense exclusion, so moving reimbursements remain non-taxable by the state. |
| Virginia | Follows federal rules; continues to exclude qualified moving expense reimbursements from state taxable income. |
| Washington | No state income tax. |
| West Virginia | Conforms to federal rules (moving reimbursements taxable, no unreimbursed expense deduction). |
| Wisconsin | Conforms to federal rules (no state-specific differences on reimbursements). |
| Wyoming | No state income tax. |
| District of Columbia | Follows federal rules; still allows exclusion of moving expense reimbursements (DC did not conform to the federal change on moving expenses). |
As shown above, most states align with IRS rules, but some carve out their own policies (especially for moving expenses or allowing deductions that the federal law doesnât). Always double-check your stateâs latest tax guidelines for any changes.
Real-World Examples: Taxable or Not?
Example 1: Flat Allowance Without Receipts (Taxable to Employee)
ABC Corp gives an employee a flat $200 per month for home office expenses with no receipts required. This arrangement fails the accountable plan requirements (no substantiation), so the $200 each month is treated as extra taxable wages. The employee must pay income tax and payroll tax on that money. The company can still deduct the $200 as a business expense (compensation), but the employee cannot claim any home office deduction for those costs.
Example 2: Properly Documented Trip Reimbursement (Tax-Free)
Jane pays $500 for airfare and hotel on a work trip and submits her receipts and a report explaining the business purpose. Her employer reimburses the full $500 under an accountable plan. Janeâs $500 reimbursement is not included in her wages or taxed, because it was a valid business expense with proper documentation. The company deducts the $500 as a travel expense on its corporate tax return.
Example 3: Excess Per Diem Paid (Partially Taxable)
Johnâs employer provides a per diem of $300 per day for a business trip, but the federal per diem rate for that location is $200. John isnât required to turn in meal receipts because of the per diem, but the extra $100 per day above the IRS limit is considered excess. The employer will treat that $100 per day excess as taxable wages on Johnâs paycheck. The $200 per diem within the allowed limit remains tax-free to John.
Example 4: Contractor Expense Reimbursement via 1099
A freelance consultant invoices a client $5,000 for services plus $500 for travel expenses. The client pays $5,500 total and reports $5,500 on a 1099-NEC. The consultant will include $5,500 as income on her Schedule C, but she will also deduct the $500 travel cost as a business expense. In the end, she pays tax only on the $5,000 net profit from the contract. (If the client had paid the $500 travel cost separately and not included it on the 1099, the consultant would simply report $5,000 income and not deduct the travel expense â the net result is the same.)
Example 5: Moving Expenses Reimbursed (Taxable Federally, Tax-Free in Some States)
XYZ Corp pays $5,000 to a moving company for an employeeâs relocation. Under current federal rules, that $5,000 must be added to the employeeâs W-2 wages and will be subject to income and payroll tax. Anticipating this, XYZ Corp also provides an extra $2,000 âgross-upâ payment to help cover the employeeâs tax on the moving benefit. If the employee is moving to a state like California or New York, the $5,000 relocation reimbursement would not be taxed on the state income tax return (because those states still exclude moving expenses), but it remains taxable for federal purposes.
Common Mistakes to Avoid đŤ
No accountable plan in place: Not establishing an accountable plan for employee expenses is a big mistake. Without one, all reimbursements might become taxable wages unnecessarily for both the company and the employee.
No receipts or documentation: Failing to collect receipts, mileage logs, or other proof of expenses can jeopardize the tax-free treatment. If you canât substantiate an expense, the IRS can reclassify that reimbursement as taxable income.
Above-limit allowances: Giving blanket allowances or per diems above IRS-approved rates without accounting for the excess will result in a portion of the payment being taxable. Always adjust or track expenses against the limits.
Reimbursing personal expenses: Paying for something that isnât a legitimate business expense (or cannot be tied to business use) and calling it a âreimbursementâ will not fool the IRS. Such payments end up taxable to the employee and could lead to penalties for misclassification.
Payroll reporting errors: Forgetting to include taxable reimbursements on payroll forms is another common error. For example, if an employee got a non-accountable allowance, it must be added to their W-2 wages. Omitting it could cause under-reporting of income and trigger IRS or state tax notices.
Counting on deductions: Employees sometimes assume they can deduct any expenses that werenât reimbursed. In reality, the federal tax deduction for unreimbursed employee expenses is suspended (2018â2025), so if you donât get reimbursed, youâre generally stuck with the cost personally (though a few states allow a deduction on the state return).
Key Terms and Definitions
Accountable Plan: An IRS-approved expense reimbursement arrangement that requires a business purpose for expenses, timely substantiation (proof/receipts), and the return of any excess amounts. Reimbursements under an accountable plan are not treated as income to the employee.
Non-Accountable Plan: A reimbursement arrangement that doesnât meet accountable plan requirements. Payments under a non-accountable plan are included in the employeeâs wages as taxable income and are subject to income and payroll taxes.
Fringe Benefit: Any form of compensation other than regular wages (for example, perks, benefits, or reimbursements). Many fringe benefits are taxable, but some can be excluded from income if certain conditions are met (expense reimbursements, when properly handled, are considered an excludable fringe benefit).
Working Condition Fringe: A type of nontaxable fringe benefit for expenses that an employee incurs in their work and that would be deductible as a business expense if the employee paid them. Expense reimbursements are often treated as working condition fringe benefits when they meet IRS requirements (e.g. employer-provided cell phone for work use).
Per Diem: A daily allowance for expenses (usually lodging, meals, and incidentals) in lieu of reimbursing actual costs. If the per diem provided does not exceed IRS-approved rates for the location and the travel has a business purpose, it is not taxable to the employee.
Standard Mileage Rate: The rate set by the IRS per mile for business use of a personal vehicle (for example, 67 cents per mile in 2024). Employers can use this rate to reimburse employees for business travel in their own car tax-free, instead of covering actual gas, maintenance, and depreciation costs.
Gross-Up: An extra payment added to a reimbursement to cover the taxes that will be owed on it. Employers often gross-up taxable reimbursements (like moving expenses) so the employee receives the intended benefit amount net of taxes.
Form W-2: The tax form employers give employees each year showing wages paid and taxes withheld. Taxable reimbursements to employees are included on the W-2 as part of wages, whereas properly handled non-taxable reimbursements (under an accountable plan) do not appear on the W-2.
Form 1099-NEC: The tax form businesses issue to independent contractors to report payments for services. It generally includes all amounts paid to the contractor, including any expense reimbursements, unless the payer separates reimbursements. Contractors report this income and then deduct the business expenses on their tax return.
FAQs about Taxable Reimbursements
Q: Are reimbursements considered income?
A: No, not if itâs a proper reimbursement for business expenses under an accountable plan. If itâs not handled correctly (i.e. paid under a non-accountable arrangement), then yes â it will count as taxable income.
Q: Is mileage reimbursement taxable?
A: No, as long as the reimbursement rate is at or below the IRS standard mileage rate and itâs part of an accountable plan. Any amount paid above the standard rate would be taxable income.
Q: Are meal reimbursements taxable to employees?
A: No, if theyâre for legitimate business meals (or within per diem limits) under an accountable plan. Employees wonât be taxed on meal reimbursements that follow IRS guidelines and substantiation rules.
Q: What happens if I donât return excess reimbursement money?
A: If you receive more than you spent and you donât return the extra, that excess amount becomes taxable income to you â it would be added to your wages on your W-2.
Q: Can I deduct expenses my employer didnât reimburse?
A: Not on your federal return (for 2018â2025, those deductions are suspended). Some states allow deductions for unreimbursed employee expenses, but on your federal taxes you generally canât deduct them under current law.
Q: Does my employer have to report reimbursements to the IRS?
A: If reimbursements are non-taxable (under an accountable plan), they wonât show up on your W-2. If theyâre taxable, they must be included on your W-2 (or on a 1099 form for a contractor).
Q: Is a per diem taxable income?
A: No, as long as itâs at or below the government-approved rate for the location and used for business travel with proper documentation. Any amount above the approved per diem limit would be taxable.
Q: Are moving expense reimbursements taxed now?
A: Yes. Under current federal law (through 2025), moving expense reimbursements are taxable to employees (except for active-duty military). Some states still treat them as tax-free, but federally you will owe tax on them.
Q: Do independent contractors pay self-employment tax on reimbursements?
A: If youâre a contractor and a reimbursement is included on a 1099, itâs effectively treated as incomeâbut you can deduct the expense, so you only pay self-employment tax on the profit remaining.
Q: Can my employer deduct reimbursed expenses on their taxes?
A: Yes. Businesses can generally deduct the reimbursements they pay for business expenses. For instance, travel and supply reimbursements are deductible business costs for the company (though some categories like meals have partial limits on the employerâs deduction).