With the COVID-19 pandemic forcing the majority of Americans to stay home, much of our workforce has gone remote. Under some state labor codes, that could require employers to take on additional reimbursement of work expenses.
State labor codes and employee reimbursement
As we have reported over the past several years, California's labor code in Section 2802 requires employers to reimburse all "necessary expenditures and losses" incurred as a part of an employee's job responsibilities, including all "reasonable costs." Several other states have similar labor laws, including Illinois, Massachusetts, Iowa, New Hampshire, and South Dakota, so it is important for employers to know what the law requires in the jurisdictions where their employees live.
Furthermore, in January 2020 California's Assembly Bill 5 expanded the definition of "employee" under the labor code to include many contractors as well. [Update: Proposition 22, which passed in November of 2020, exempts app-based food delivery and rideshare workers from this new definition of employee, keeping them independent contractors.]
While we have in the past emphasized the importance of adhering to state reimbursement laws when it comes to vehicle expenses, we are now advising employers to find out what additional expenses they may need to reimburse now that so many workers are conducting their responsibilities from home.
Under federal law, there is no such requirement, as long as employees are making above the minimum wage when work expenses are deducted. But there is also the issue of fairness to employees who may incur a new set of expenses as a result of working from home rather than from an office or from their vehicle.
Reimbursable expenses for remote work
The remote work expenses that must be covered by employers in states with strict reimbursement laws includes mostly communications devices and plans. This list would include phones, phone service, internet service, computers and/or tablets, and any communications or home office expenses that are required. Devices and services that add convenience but are not necessitated by job responsibilities would be excluded.
While some organizations supply a company phone, others opt to pay a mobile device stipend or reimburse some portion of an employee's personal phone bill under a "Bring Your Own Device" plan (BYOD). Under the California labor code, section 2802, all business use of a personal cell phone must be reimbursed.
And now that many employees are using their home internet, the business portion of their internet bill is reimbursable, even if they would have had a home internet plan before. Because they are now required to use their home internet for work purposes, it is covered under CA labor code 2802 and similar state labor codes.
Expenses associated with maintaining a home office could also be reimbursable since it is now required to have a physical space at home devoted to company work, until the COVID-19 restrictions are lifted.
Tax implications for remote work
Under the Tax Cuts and Jobs Act, individual taxpayers may no longer deduct unreimbursed business expenses. This means that employees have no way to recover new business expenses outside of an employer reimbursement or stipend. In a state like California with a strict labor code, employees could resort to taking their employers to court.
Whether payments to an employee to offset work expenses is taxable depends on whether it's an actual reimbursement or just a bump in salary in order to generally cover costs. During the current crisis, under IRS Code Section 139 employers can make tax-free "qualified disaster payments" to cover home internet, home office, and phone expenses that arose directly from the COVID-19 pandemic. However, when the national emergency is lifted, employers will need to pay close attention to the ordinary tax implications of these payments.
As we have often pointed out with vehicle expense payments, a car allowance is treated as taxable income, whereas a vehicle reimbursement is non-taxable. In some cases the employer can even deduct employee reimbursements, but under normal circumstances a stipend or allowance to cover costs is taxable to both employee and employer unless they have an accounting procedure that substantiates business use of the entire payment.
Work-from-home stipend or reimbursement?
As in the case of a car allowance versus a vehicle reimbursement, it is generally preferable to choose a non-taxable approach. Otherwise, you end up losing 30-40% of the payment to taxes. However, because the accounting procedures for non-taxable reimbursements can be tricky to manage, many employers just choose to pay a set monthly stipend or allowance, whether for vehicle expenses or mobile device expenses or home office expenses.
The key to achieving a non-taxable reimbursement is to find out what the monthly expense of an employee is likely to be for each of the reimbursable categories. This amount will differ from employee to employee, but in the case of mobile devices, home internet, and home office expenses it is often easier to figure out than vehicle expenses, since those expenses tend to be less variable and more tied to a set of monthly payment plans.
In the short term, organizations whose employees suddenly were forced to work from home can make these payments tax-free without substantiating business use, under IRS Code Section 139. However, in the long run, if those employees continue to work at home, employers will need an IRS-accountable procedure to prove business use.
If you have been paying a car allowance or vehicle reimbursement but are not sure whether to continue doing so while employees work remotely, here is a helpful guide to that decision. Or if you face a situation in which some employees are working from home and some are on the road or in the office, depending on what state they work in, we have guidance on that set of challenges as well.
Whatever the case, it is important to know the labor laws governing the states where your employees work and to ensure your organization's compliance with those laws.