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Navigating Remote Worker Reimbursements: Tax Implications & Strategies

As remote work becomes the norm, managing reimbursements for your remote team is critical. These employees might incur expenses like internet bills, home office supplies, and possibly extra phone charges. And as a considerate employer, you want to support them by covering these costs.

Here's the challenge: the reimbursement method you choose has significant tax implications.

Primarily, there are two reimbursement paths:

Path 1: The Simple Route — Taxable Reimbursements

You might choose to issue a flat $150 “remote work stipend” each month through payroll. It’s straightforward and predictable for both parties.

However, this approach categorizes the stipend as taxable income.

The consequences include:

  • Payroll taxes paid by the employer.

  • Income taxes paid by the employee.

  • Inclusion on the employee’s W-2 form as wages.

While convenient, this method can diminish the actual post-tax value employees receive, reducing it potentially to $100 after taxes from the initial $150.

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Path 2: The Tax-Free Route — Accountable Plans

An accountable plan allows you to reimburse employees without tax liabilities.

The benefits are clear:

  • No payroll taxes incurred.

  • No income taxes deducted.

  • No W-2 reporting requirement.

While the business can deduct these expenses, the employee receives the full reimbursement amount. The key requirement here is meticulous documentation: employees must present receipts, logs, or statements and return any unspent advance funds.

For more details, consult the IRS guidelines on Accountable Plans.

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Choosing the Right Path

Your choice hinges on your team's composition and your administrative capacity.

  • Dislike paperwork? Opt for the straightforward, taxable reimbursement route.

  • Aim to enhance employee take-home pay and cut tax expenditure? Then, an accountable plan might be more advantageous, despite the initial setup effort it demands.

It’s important to note that some states, such as California, mandate reimbursement of necessary business expenses. Thus, absent a structured plan, your business might not only miss out on savings but also face compliance risks.

Expert Tip: Customize Your Reimbursement Plans

Diversify your reimbursement plans based on roles and requirements with a tiered approach:

  • Basic Level: Cover essentials like internet and phone costs.

  • Mid-Level: Include additional office equipment provisions.

  • Executive Level: Expand coverage to travel expenses, tools, and more.

As long as the expenses fundamentally pertain to business and are documented (especially under an accountable plan), the IRS won’t pose any challenges.

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Conclusion

Two reimbursement strategies are available: one offers simplicity with a tax impact, while the other provides structure with tax benefits. Choose based on your business priorities.

As remote work becomes increasingly common, proactive reimbursement planning can protect your business and enhance employee satisfaction without incurring needless tax costs.

Take Action

Our firm, PM Enterprises Inc, stands ready to assist you in determining and implementing the best reimbursement strategy tailored to your business needs. Contact us today to alleviate the burden of managing remote work reimbursements effectively.

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