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Three types of employee reimbursement

Written by: Josh Miner
December 4, 2020 at 9:22 AM

Nearly every organization has times when they need to reimburse employees for expenses. 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 key types.

1) Business expense reimbursement

Business expenses are incurred by an employee while performing work for an organization. According to the IRS, business expenses may include the following:

  • Business travel (discussed more in the next section)
  • Education or training
  • Business supplies
  • Business tools
  • Miscellaneous business-related expenses

Download our guide to 11 employee retention strategies.

Tax deductible business expense reimbursements

Some expenses are tax-deductible. For a business expense 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 work for the organization must be associated with 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

Another type of employee reimbursement is for auto mileage and travel expenses. Technically, this is a type of business expense reimbursement, however there are some specific characteristics of travel reimbursement that set it apart from the other types.

  • Standard mileage rates. Mileage rates are a way to reimburse employees for gas and wear and tear on their vehicle. Most businesses use the standard IRS mileage rates when reimbursing employees for personal automobile travel. Check out IRS Mileage Rates for this year's information.
  • Per diem travel. If employees are traveling for work, the employer can offer a fixed “Per Diem” allowance for lodging (excluding taxes), meals, and incidental travel expenses. Employers can use this as a “maximum reimbursement amount” and gather and track receipts, or they can assume expenses will reach this amount and reimburse the employee the entire amount whether they use it or not to avoid the hassle of tracking the 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

A third type of expense is medical expense reimbursement. Reimbursing medical expenses is an alternate way for employers to offer employees a health benefit. They are also known as Section 105 plans.

Common types of medical expense reimbursement "plans" include:

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Conclusion

Organizations reimburse employees for a wide variety of expenses, including office supplies, meals and travel while conducting business, and even medical expenses. Depending on the type of expense and the way employers handle these reimbursements, many of them can even be tax free.

This post was originally published on December 22, 2014. It was last updated December 4, 2020.

Topics: Health Reimbursement Arrangement, Health Benefits, Small Business, Human Resources

Additional Resources

Trying to decide which HRA is best for you? Take our quiz to find out.
Which is better for you—the QSEHRA or the ICHRA? Get our chart to find out.

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