Whatever the circumstances of your employees – working from a vehicle, working from home, or working in the office – it is important to know their state's reimbursement laws. In states that require full reimbursement of employees for business expenses – vehicles, cell phones, home office equipment – this can be challenging and costly.
What expenses for employees should be reimbursed?
(The following should not be construed as legal advice – make sure to consult legal counsel about company reimbursement policies.)
Under federal law, employers are not required to reimburse employees for business expenses unless those expenses reduce the employee's pay below the minimum wage. In many fields, however, employees expect to be reimbursed for any expenses incurred as part of their work, and businesses that seek to be fair and competitive create policies defining what expenses are reimbursable and procedures to obtain reimbursements.
As a result of the 2017 tax reform, even more employees now expect full reimbursement of work expenses. This is because the tax cuts also removed the popular deduction for unreimbursed business expenses. In the past, an employee could deduct mileage from work-related trips or receipts for vehicle expenses, cell phone expenses, etc. if the company did not already use an IRS accountable plan for business reimbursements.
Some state labor codes require full reimbursement of employees for business expenses. California labor code, section 2802, is a well-known example of this. Illinois, Massachusetts, Rhode Island, New Hampshire, and North and South Dakota also have strict reimbursement laws. If you have employees working in a state with an indemnification code that requires reimbursement of business expenses, it is imperative that your company take action to keep up with employees' changing expense needs.
Let's look at three different categories of employees that may need some kind of reimbursement.
Reimbursement of mobile workers (vehicle-based)
If an employee does a lot of driving as part of their job, or their personal vehicle is their office, then their business-related vehicle costs should be reimbursed. If they drive a company car, then most of those costs are already paid for by the company. If they drive a personal vehicle, then they face a wider array of costs that should be paid for by the employer.
These vehicle costs include not only obvious ones like gas, oil, tires, and maintenance, but also car insurance, depreciation, taxes, and license/registration. Many businesses just pay a standard, monthly car allowance, but often a car allowance does not fully cover expenses due to the amount deducted for taxes (often 30 to 40%).
Non-taxable car reimbursements exist, which tend to give better results. Mileage reimbursement using the IRS standard business rate or less (62.5 cents-per-mile for 2022) is non-taxable, though it has well-documented problems with fairness and cost control. Fixed and variable rate reimbursement is another non-taxable approach that is more equitable and more cost-effective. Both require mileage tracking to substantiate business use of the vehicle expenses.
Mobile employees may also be entitled to reimbursement of expenses for their mobile device. The company may choose to give them a phone or tablet and pay for their mobile plan, or the business portion of their personal device and mobile plan. And, of course, meals, accommodations, airfare, etc. can also be reimbursable if required as part of the employee's travel.
Reimbursement of office workers
In many cases, an office-based worker will have few-to-no expenses needing reimbursement. If they have access to company-owned phones, landlines, internet, computers, etc., in the building, then this makes it easier to avoid reimbursable needs. If they sometimes take trips in a personal vehicle as part of their job, then a vehicle reimbursement plan would be required, and if they have to use a personal mobile device during these trips, the same would apply to that device.
It is important to note that morning and evening commutes do not count as business use of a vehicle. So any vehicle reimbursement plan for an office-based worker does not need to include mileage from and to the employee's home.
Reimbursement of employees working remotely
Working from home can come with a number of reimbursable expenses. In states that require full reimbursement of employee business expenses, it is vital that employers know and comply with their state laws. The Covid-19 pandemic pushed many organizations to a remote work model, and as a result, they had to figure out what expenses to reimburse.
While some organizations may supply a company phone, others pay a mobile device stipend or reimburse some portion of an employee's personal phone bill under a "Bring Your Own Device" plan (BYOD).
Not only are personal mobile devices and mobile plans used for work reimbursable, but so are home internet, home offices, and home office equipment such as printers – that is, the business percentage of their use. But it is necessary to demonstrate business use in order for an employer to provide non-taxable reimbursements. Otherwise any payments intended to reimburse work expenses are treated as taxable income.
It is particularly important to reimburse these expenses under state laws like California labor code, section 2802, but many companies will want to provide reimbursement because it is a reasonable and fair way to treat employees.
Staying responsive to employee reimbursement needs
Though many businesses have now returned their workers to the company office, others continue to operate under a remote work model or a blend of office and remote work.
It is important for organizations operating with a variety of employee work conditions to have flexible reimbursement plans. A more flexible reimbursement plan is a more competitive reimbursement plan at a time when more workers place a premium on being able to work at least part of the time from home or a vehicle.
To learn more about flexible, non-taxable reimbursement plans for vehicle use that comply with state labor codes, select the button below.