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Small Business Employee Benefits and HR Blog

3 Types of Employee Reimbursement

December 22, 2014
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As your small business hires employees and gears up it's operations, there will come a time when you need to reimburse an employee for an expense. Whether the expense is for office supplies, a business dinner, travel to an expo, or healthcare, it's important to understand the different types of employee reimbursement and how to account for them. Let’s take a look at three main types.Types of Employee Reimbursement - A Guide for Small Business Owners

1) Business Expense Reimbursement

The first main type is business expense reimbursement. These are expenses incurred by an employee for business purposes. According to the IRS, these types of expenses may include:

  • Business travel (discussed more in the next section)

  • Education or training

  • Business supplies

  • Business tools

  • Miscellaneous business-related expenses

For business expenses to be tax-deductible to the business (and received tax-free by the employee), they must fall under the definition of an “accountable plan” and meet these three requirements:

  1. The employee must have paid for or incurred expenses while performing services as an employee, and there must be a business connection to the expenditure.

  2. The employee must adequately account for these expenses within a reasonable time period. Receipts need to verify the date, time, place, amount, and what the business expense was for.

  3. The employee must return any excess reimbursement or allowance within a reasonable time period. For example, if an employee is provided $20 to purchase office supplies, and the actual expense was $17, the employee needs to return the $3 to the business.

Source: IRS.

2) Auto Mileage and Travel Reimbursement

The second main type of employee reimbursement is for auto mileage and travel expenses. Technically, this is a type of business expense reimbursement however there are some specifics to know.

  • Standard Mileage Rates. Most businesses use the standard IRS mileage rates when reimbursing employees for personal automobile travel. For 2014, the standard mileage rate is 56 cents per mile for business miles driven. For 2015, the standard mileage rate is 57.5 cents per mile (Source: IRS Mileage Rates).

  • Per Diem Travel. If employees are traveling away on business, the business can offer a fixed “Per Diem” allowance for lodging (excluding taxes), meals, and incidental travel expenses. The General Services Administration (GSA) establishes Per Diem rates for different regions within the U.S. (click here to look up rates). 

3) Medical Expense Reimbursement

The third main type is medical expense reimbursement. There are a few different types of medical expense reimbursement plans, and their usage (and tax benefits) vary.

Common types of medical expense reimbursement "plans" used by small businesses include:

  • Health Savings Accounts (HSAs) - Individually-owned bank accounts owned by employees that allow tax-free medical expense reimbursement.

  • Health Reimbursement Arrangements (HRAs) - Used to reimburse medical expenses tax-free, and usually paired with a high-deductible health insurance plan.

  • Healthcare Reimbursement Plans (HRPs) - Used to reimburse individual health insurance premiums tax-free.

  • Health Flexible Spending Accounts (FSAs) - Health FSAs offer a tax-free way for employees to save for qualified medical expenses during a single year. They are usually (though not always) employee-funded.

  • A taxable “stipend” for health insurance - A taxable stipend or allowance for employees to use on health insurance or medical expenses.

Read more here about employee medical reimbursement plans.

Tip: As you develop your employee reimbursement policies and procedures, document them in your employee handbook. For more HR basics, click here. 

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