Tax-Free Employee Reimbursements for Small Businesses

Create an accountable plan: Ensure reimbursements have a business connection and meet IRS guidelines.
Define eligible expenses: Set clear rules for reimbursable items like travel, supplies, and client meetings.
Set limits and timelines: Establish spending caps and require prompt expense submission.
Require documentation: Always ask for receipts, especially for expenses over $75.
Leverage technology: Use expense management software for efficient tracking and compliance.

What Are Non-Taxable Reimbursements?

Tax-free (or non-taxable) reimbursements are payments made to employees for business expenses that are not considered taxable income. This means employees don’t pay taxes on these reimbursements, and your business can deduct them as legitimate expenses.

The Key: An IRS-Compliant Accountable Plan

To keep reimbursements untaxed, you need what the IRS calls an "accountable plan." Don't worry, it's not as complicated as it sounds. An accountable plan is simply a system that follows these rules:

Expenses must have a business connection.
Employees must adequately account for these expenses within a reasonable time.
Employees must return any excess reimbursement within a reasonable time.

Setting Up Your Reimbursement Policy

Here's how to create a policy that meets IRS requirements:

Define Eligible Expenses: Clearly specify what types of expenses your business will cover. Common examples include:
Set Spending Limits: Establish spending caps for different categories to prevent overspending and keep things clear for both you and your employees.
Simplify Submission Processes: Make it easy for employees to submit expenses. Many businesses use apps or software like Expensify or Receiptor AI to streamline the process.
Set Timelines for Submission and Refunds: Employees should submit expenses and return any excess reimbursement promptly—ideally within 60 days, as recommended by the IRS.
Require Documentation: Employees must provide receipts or proof of expenses. The IRS typically requires receipts for expenses over $75, so make this part of your policy.

Documentation is Key

Proper record-keeping is crucial. For each reimbursed expense, you should have:

The amount of the expense;
The time and place of the expense;
The business purpose of the expense;
Receipts for expenses over $75.

Technology Can Help

Consider using expense management software to streamline the process. These tools can:

Allow employees to easily upload receipts
Automatically categorize expenses
Flag expenses that don't meet your policy
Generate reports for your records

Common Pitfalls to Avoid

Reimbursing Personal Expenses: Only business-related costs should be reimbursed;
Paying "Flat" Amounts: Avoid giving set amounts without requiring documentation;
Delayed Reimbursements: Process reimbursements promptly to stay compliant.

What If You Reimburse More Than the Actual Expense?

If you accidentally reimburse more than the documented expense, the excess amount becomes taxable wages. To avoid this, make sure your policy includes a process for employees to return overpayments.

Benefits of a Good Reimbursement System

Happier Employees: They're not out-of-pocket for business expenses;
Tax Savings: Properly managed reimbursements aren't taxed as income;
Better Expense Control: You have clear visibility into business spending;
Simplified Accounting: With clear records, tax time becomes easier.

Conclusion

Creating an untaxed employee reimbursement system might seem daunting, but it's worth the effort. It saves money for both your business and your employees while ensuring you stay on the right side of IRS regulations. Start with a clear policy, use technology to your advantage, and keep good records. If you're unsure about any aspect, don't hesitate to consult with a tax professional. With the right system in place, you can turn expense management from a headache into a smooth, beneficial process for everyone involved.

What are non-taxable reimbursements?

Non-taxable reimbursements are payments made to employees for business expenses that aren't considered taxable income.

What is an accountable plan for untaxed reimbursements?

An accountable plan is an IRS-compliant system that ensures business expenses are properly tracked and reimbursed without being taxed.

How can small businesses create a tax-free reimbursement policy?

Define eligible expenses, set spending limits, require timely submissions and documentation, and use technology to streamline the process.

What documentation is required for non-taxable reimbursements?

Businesses should require receipts for expenses over $75 and detailed records of the amount, time, place, and business purpose of each expense.

What are common mistakes to avoid with reimbursements?

Avoid reimbursing personal expenses, giving flat payments without documentation, and delaying reimbursements to stay compliant.