- Feb 17
- 3 min read

Employee Reimbursed Business Expenses and Taxation

Updated: Feb 18

Employee reimbursed expenses may or may not be taxable as income to the employee, depending on various factors and the tax laws in your jurisdiction. Here's a general overview of employee reimbursed business expenses and taxation:

Non-Taxable Reimbursements: Many business-related expenses reimbursed to employees are considered non-taxable, meaning they are not subject to income tax. These typically include expenses incurred for legitimate business purposes, such as travel expenses, meals while traveling for business, business-related entertainment, and other expenses directly related to the performance of the employee's job duties. As long as these expenses meet certain criteria outlined by tax authorities (such as being substantiated with receipts and incurred for business purposes), they are often excluded from the employee's taxable income.

Taxable Reimbursements: Some reimbursed expenses may be considered taxable income to the employee. For example, if an employer reimburses an employee for expenses that are not considered ordinary and necessary business expenses, or if the reimbursement exceeds the actual expenses incurred, the excess amount may be taxable. Additionally, certain fringe benefits provided to employees, such as the personal use of a company car or reimbursement for gym memberships, may be subject to taxation.

Accountable vs. Non-Accountable Plans: The tax treatment of reimbursed expenses can also depend on whether the employer has an accountable or non-accountable reimbursement plan in place.

1.) Accountable Plan Reimbursements: If an employer has an accountable reimbursement plan in place, where employees are required to substantiate their business expenses and return any excess reimbursements, the reimbursements made under this plan are not considered taxable income to the employee. As a result, they are not reported on the employee's Form W-2. Under an accountable plan, reimbursements are made for legitimate business expenses, and any excess amounts must be returned to the employer or are taxable to the employee. Reimbursements made under an accountable plan are generally not taxable to the employee. This includes reimbursements reported under code “L” in box 12 of Form W-2. Amounts reported under code “L” are reimbursements you received for business expenses that weren't included as wages on Form W-2 because the expenses met specific IRS substantiation requirements.

Generally, when your employer pays for your expenses, the payments shouldn't be included in box 1 of your Form W-2 if, within a reasonable period of time, you:

Accounted to your employer for the expenses; and
Were required to return, and did return, any payment not spent (or considered not spent) for business expenses.

*Travel expense reimbursements are not included as income with form 1099 NEC

2.) Non-Accountable Plan Reimbursements: Reimbursements made under a non-accountable plan, where employees are not required to substantiate expenses or return excess amounts, are treated differently. In this case, the reimbursements may be considered taxable income to the employee and would typically be reported on the Form W-2 as part of their wages. These are expenses that are reported to you in box 1 of your Form W-2. Your employer will include any reimbursements it makes in your taxable income (in Box 1 on your W-2), and will withhold income tax, Social Security tax, and Medicare tax on them.

IRS Form 2016 is used to deduct ordinary and necessary expenses if you were an Armed Forces reservist, a qualified performing artist, a fee-basis state or local government official, or an employee with impairment-related work expenses. Employees who do not fit into one of the listed categories may not use the Form 2106 due to the suspension of miscellaneous itemized deductions subject to the 2% floor under section 67(a) of the US Tax Code 26. Section 67(g) suspends miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026.

Prior to the suspension, taxpayers who itemized their deductions on Schedule A of Form 1040 could deduct miscellaneous expenses to the extent that they exceeded 2% of their adjusted gross income (AGI). However, with the passage of the Tax Cuts and Jobs Act (TCJA) of December 2017, many miscellaneous itemized deductions were suspended for tax years 2018 through 2025.

It's important to note that certain miscellaneous deductions were not affected by the suspension and remain deductible, such as gambling losses to the extent of gambling winnings, certain unrecovered investment in annuities, and certain casualty and theft losses.

It's important for both employers and employees to understand the tax implications of reimbursed expenses and to comply with relevant tax laws and regulations. Employees should review their Form W-2 each year to ensure that any reported reimbursements are accurate and reflect the proper tax treatment.