Employee expense reimbursement

Last updated: June 30, 2026

Employees who pay for business-related expenses out of pocket may be reimbursed by their employer at a later date. This guide explains what counts as a reimbursable business expense, the tax implications of reimbursements and how to create policies for reimbursing employees.

Employee reimbursement key takeaways:

• Reimbursements may be required due to state regulations or if business-related expenses cause a nonexempt employee’s wages to fall below minimum wage.
• Examples of business-related expenses that may be reimbursable include travel costs, tools and equipment, and uniform purchases.
• Employee reimbursements are tax-free if they meet the requirements of an accountable plan.
• Eligibility criteria, a list of covered expenses and an explanation of the expense report submission process should be documented in company reimbursement policies.

What is expense reimbursement?

Expense reimbursements are how employers pay back employees who used their own money to pay for business-related expenses. Such refunds may be necessary to satisfy Fair Labor Standards Act (FLSA) minimum wage requirements. Additionally, some states require employers to reimburse employees for any reasonable business expense they incur, including uniforms, tools and travel.

What counts as a reimbursable business expense?

Common business expenses that may be reimbursed include:

• Use of a personal vehicle for business purposes
• Business travel expenses, such as meals and lodging
• Tools and equipment required to perform the employee's job
• Use of a personal cell phone for business purposes
• Required uniform purchases and maintenance
• Home office equipment or internet access

Personal vehicle usage

Some states require employers to reimburse employees for the expenses they incur while driving personal vehicles for company business. The IRS standard mileage rate can be used to calculate the reimbursement. It covers the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, fuel and oil.

Explore Mileage reimbursement

Business travel

Depending on the state, employers may be required to reimburse employees for business travel expenses, including transportation, lodging and meals. The presence of these requirements does not mean that employees have free rein to book five-star hotels, though. Employers are allowed to place reasonable limits on business travel expenses.

For example, company policies may dictate the types of lodging and air transportation (coach vs. first class) eligible for reimbursement. If an employee chooses first-class air travel when the policy expressly covers only coach, the individual may have to cover the upgrade out of pocket. Such specifics should be communicated to employees in writing before they travel.

Uniforms

Several states require businesses to cover the full cost of required uniforms, as well as any related maintenance fees, such as dry cleaning services. Employers can either purchase the uniforms upfront or reimburse employees for the expenses.

Tools and equipment

Reimbursing employees for any tools and equipment necessary to perform their jobs is mandated in some states. As with uniforms, employers have the alternative option of paying the full cost up front.

Employers must also cover the cost of personal protective equipment (PPE) in accordance with Occupational Safety and Health Act (OSHA) regulations. Replacement PPE may be the employees’ responsibility if they intentionally lose or damage the original equipment.

Note: Certain tools, such as those customarily required by a trade, may be exempt from state requirements.

Home office equipment

Businesses may be required to reimburse remote employees for their home office equipment under applicable state law. If the expense is used for both work and personal use, such as an internet service, employees may be asked to track and report how much of the cost is attributable to business activities. The employer would then issue a reimbursement for that amount.

Expense reimbursement and minimum wage

The FLSA requires employers to reimburse nonexempt employees for any work-related expense that would reduce their pay below minimum wage or diminish their overtime earnings. The reimbursements must be processed no later than the next regular payday.

Are expense reimbursements taxable income?

Reimbursements for business-related expenses are generally not considered wages or income and, therefore, are not subject to tax withholdings. To remain tax-free, however, the reimbursements must meet IRS criteria for accountable plans.

Types of employee reimbursement programs

Employees can be reimbursed through either an accountable plan or a nonaccountable plan. Employers may use both plans for different types of reimbursements.

Accountable plan reimbursements

According to the IRS, employee reimbursements are tax-free under an accountable plan as long as they meet the following requirements:

• There is a business connection to the expense.
• The recipient has provided adequate accounting within a reasonable time period.
• Excess reimbursements or advances are returned within a reasonable time period.

Business connection

A business connection exists if an employee paid or incurred allowable expenses while performing job-related activities. Additionally, the reimbursement for these costs must not be an amount that would otherwise have been paid to the employee as wages.

Adequate accounting

Employees must verify the date, time, place, amount and business purpose of their expenses. Receipts, bills or canceled checks may be used for documentation.

These requirements apply to most types of reimbursements except the following:

• Meal or lodging expenses that are reimbursed on a per diem basis or at a rate that does not exceed the maximum allowed under an accountable plan.
• Individual expenses less than $75 (excluding lodging).
• Transportation expenses for which receipts are not readily available.

Timely return of excess reimbursements

Employees must return any excess reimbursement within a reasonable time period. The length of time deemed reasonable depends on the facts and circumstances of each case.

Nonaccountable plan reimbursements

Reimbursements that do not meet the aforementioned criteria (business connection, adequate accounting and timely returns) are considered nonaccountable plans. As such, employers must treat the reimbursements as wages paid to the employee and withhold all the applicable taxes.

How to create an employee expense reimbursement policy

When creating expense reimbursement policies, employers should ensure they cover the following topics:

• Employee eligibility
• Covered expenses
• Procedures

Employee eligibility

Eligibility may be dictated by applicable state reimbursement laws and FLSA regulations, particularly if the business has nonexempt employees. Absent any of these requirements, employers may offer reimbursements to certain groups of employees as an engagement and retention tactic. For example, the policy might state that only members of a traveling sales team are eligible for expense reimbursements.

Covered expenses

The policy should list the expenses eligible for reimbursement, e.g., travel, lodging, uniforms, etc. Employers may also want to provide examples of expenses that will not be covered, such as costs associated with the daily commute to and from the workplace.

Procedures

This section of the policy explains how employees can be reimbursed for their work-related expenses. It should cover everything needed to complete an expense report, including vehicle mileage, receipts and managerial approvals.

Best practices and compliance considerations

Expense reimbursements can be challenging for employers who have nonexempt employees earning minimum wage or are in states with reimbursement requirements. To help make compliance easier, they may want to ask employees to perform the following:

• Obtain supervisor approval before incurring business expenses
• Document the specific business purpose of the expense
• Track any miles driven for business activities
• Obtain and submit receipts for business-related expenses
• Request expense reimbursements in writing

How to reimburse employees for expenses

Reimbursing employees is usually done through payroll. The process is easiest using payroll software that has dedicated expense reimbursement features.

Depending on the provider, expense reimbursement may proceed as follows:

1. Within the self-service tool, employees initiate an expense report. Single or multiple bundled entries may be available.
2. Employees choose from a menu of business expenses eligible for reimbursement and enter the total cost and date. For vehicle usage, they can also enter the mileage accrued.
3. They then upload receipts and any other supporting documents.
4. Managers can review and approve the expense report within the payroll system, helping ensure faster payouts and a reduced chance of errors.

Frequently asked questions about expense reimbursements

This article is intended to be used as a starting point in analyzing expense reimbursements and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.