Remote Employees, Reimbursements & Taxes: The Two Paths You Can Take

Your team is remote.  They've had internet fees, home office equipment, and possibly additional phone costs.  And, as a good manager, you want to cover the expenditures.

But there's a catch: how you reimburse them affects everything.

There are actually just two paths:

Path 1: The “Easy” Way — Taxable Reimbursements

You write a check or run a $150 "remote work stipend" through payroll each month.  It's simple.  Everyone understands what they are getting.

But it is taxable income.

That means:

• You pay payroll taxes.
• Employees pay income tax.
• It appears on the W-2 as salary.

Is this convenient?  Sure.  But it is also pricey.  You provide $150, and they keep about $100 after taxes.

Path 2: The “IRS-Approved” Way — Accountable Plans

Here's where things get better.  With an accountable plan, you can reimburse employees tax-free.

This means:

• No payroll tax.
•  No income tax.
• No W-2 reporting.

The business still deducts the expense, but the employee receives every penny.

What about the trade-off?  Documentation.  Employees must provide receipts, logs, or records, and if you lend money, they must repay any funds they do not spend.  It's hardly rocket science, but it does necessitate a procedure.

Reference: IRS Accountable Plans

Which Way Is Right for You?

That relies on your team and your willingness to do administrative labor.

• Don't want to track receipts?  A flat, taxed reimbursement may be simpler.
• Want to optimize employee pay and cut tax costs?  An accountable plan is worthwhile to set up.

Remember that some states, such as California, mandate payment for reasonable business expenses.  So, in some cases, not having a strategy in place is not only a missed opportunity, but also a compliance risk.

Pro Tip: Tier Your Reimbursements

Not all roles require the same level of support.  You can structure various tiers:

• The basic package includes internet and a phone.
• Mid-level: Install office equipment.
• Executive level: travel, tools, and more.

The IRS is satisfied as long as the expenses are business-related and documented (if you follow an accountability strategy).

Bottom Line

Two options exist.  One is simple but taxed.  The other is structured but tax-exempt.  Both can work, depending on your priorities.

What isn't optional?  Thinking about it now.  Because, as remote work becomes more common, the manner you repay can either incur excessive tax expenditures or save your company (and its employees) real money.

Next Step

We'll help you determine the best reimbursement option for your company, whether it's establishing an accountable plan or streamlining a taxable stipend.  Contact our firm today to get this off your plate.