Are Expense Reimbursements Considered Taxable Income?
The IRS considers some employee benefits to be taxable income. But do employee expense reimbursements fall into that category?
Scenario:
Let’s say you work for a small company, and employees don’t have corporate credit cards.
Recently your boss asked you to travel to another city for a work conference. She explained you must use your personal credit cards for the plane tickets, hotel, and meals, and the company would reimburse your travel expenses after the trip.
Naturally, you might be a bit grumpy using your personal cards. Pushing your credit card balances toward their credit limits might raise your credit utilization percentage, which could negatively impact your credit score.
On the plus side, you may have loyalty rewards credit cards, so you might accrue additional miles or points by using them for business travel. You could then use those points for discounted personal travel.
Your boss explained that the company would reimburse you for the travel expenses on the next payday.
But now you’re wondering, will you owe taxes on the amount of the reimbursement?
Answer:
In short, no. But that’s provided your employer completes the pay stub accurately as part of their expense reimbursement process. If they incorrectly lump the reimbursed amount with your wages, it’s taxed.
If you’re worried, talk to your accounting department before your employer reimburses you. The “gross pay” section of your pay stub shouldn’t list the reimbursed amount.
Your pay stub should have a separate section for reimbursed amounts that are not subject to taxation. Your total expenses must be paid on a pass-through basis and not reduced by taxes or other deductions.
Claiming unreimbursed employee expenses
On the other hand, let’s say your employer didn’t reimburse you for these expenses. You’d be really grumpy.
However, only certain categories of employment qualify to deduct unreimbursed employee expenses. To do so, you must have certain qualified educator expenses or fall into one of the following categories:
Individuals serving in the Armed Forces reserves
Professionals meeting the criteria of qualified performing artists
State or local government officials compensated on a fee-basis
Employees incurring work-related expenses due to impairments
The IRS provides more detail on each of these categories of employment in Publication 529.
To deduct unreimbursed employee expenses, you will need to make an adjustment to your gross income by using Form 2106, Employee Business Expenses.
Unreimbursed employee expenses are deductible only if they meet these criteria:
They were paid or incurred during the tax year.
The expenses were for carrying on your trade or business of being an employee.
The expenses were ordinary and necessary (meaning it is a common and accepted expense in your profession).
The bottom line with expense reimbursements
Make sure your employer completes your pay stub correctly to reimburse your travel expenses. Otherwise, you might improperly pay more taxes.
It’s important to note that deducting the business expenses on your tax return is not the same as getting a tax credit. It does not directly reduce the amount of taxes you owe, and the number of deductible expenses is limited.
The best option is for your employer to pay your expenses separately from your wages. Safe travels!
This article is for informational purposes only and not legal or financial advice.
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