Key points about expense reimbursement for remote workers:
- You don’t need to reimburse remote employees unless their expenses cause their earnings to fall below the Federal minimum wage. But several states have additional requirements.
- You may also choose to provide reimbursement as a voluntary benefit.
- These tips can help you effectively manage expense reimbursement in a remote world.
- Do employers need to reimburse remote employees?
- Which states have expense reimbursement rules for remote workers?
- Best practices for reimbursing remote employees
- Reasons to reimburse remote work expenses
- How a remote work reimbursement policy can help
- Are expense reimbursements tax deductible?
- Managing remote reimbursement with expense management software
- Expense reimbursement for remote workers infographic
The COVID-19 pandemic led to the rapid rise of remote work. Now, more than 58% of Americans work remotely at least part of the time. While COVID-19 isn’t spreading as rapidly, many businesses are considering a permanent shift to remote or hybrid work.
Remote work offers a variety of benefits to employers, such as saving on rent and utilities. However, this arrangement leaves remote workers to cover the cost of their own electricity, internet, and office supplies.
Are you required to reimburse remote workers? Should you reimburse remote expenses even if you aren’t required to? If you have remote employees, here’s what you need to know about expense reimbursement.
Do employers need to reimburse remote employees?
According to Federal law, you do not need to reimburse remote employees for work-related expenses unless those expenses cause their earnings to fall below:
- The Federal minimum wage of $7.25/hour for non-exempt employees, or
- The salary threshold of $684/week for exempt employees
Track remote employees’ expenses carefully to ensure they don’t fall below the Federal minimum wage or salary threshold. A large, one-time purchase (like a printer) could easily reduce someone’s wages.
Which states have expense reimbursement rules for remote workers?
Certain states and localities have their own remote reimbursement rules. These areas may require you to reimburse remote employees for work-related expenses:
- District of Columbia
- New Hampshire
- New York
- North Dakota
- South Dakota
The expenses you’re required to reimburse differ by state. For example, California requires you to reimburse employees when they use their cell phones for work-related purposes.
Other states don’t have explicit laws but require you to reimburse employees as stated in your written policies. For instance, Pennsylvania doesn’t explicitly require expense reimbursements. But if you have a written policy that offers reimbursements to employees, those reimbursements are considered “fringe benefits or wage supplements.” Depending on the claim, you need to pay them within 10 or 60 days (or as outlined in your policy).
If you have remote employees in multiple states, check the laws in each location to ensure you stay compliant.
Best practices for reimbursing remote employees
No matter where your employees work, some best practices can help you navigate remote expense reimbursement.
1. Understand the difference between necessary expenses and unnecessary expenses
Laws related to reimbursement often state that employers need to reimburse “necessary” expenses. If you’re required to comply with these laws, how do you know what counts as a necessary expense?
In most cases, a “necessary” expense is anything an employee needs to complete their job responsibilities. These sorts of expenses often include:
- Internet access
- Phone or mobile data use for business activities
- Office supplies
- Paid services (like a Zoom membership)
- Laptops, computers, printers, fax machines, and other equipment
Expenses that are typically not considered necessary include items such as:
- Ergonomic chairs
- Standing desks
- Wireless computer mouses and keyboards
However, there are exceptions to what expenses are considered necessary. For one thing, there may be state-specific requirements. Some states, like California, are more generous. In these states, expenses like air conditioning may be considered necessary and reimbursable.
Your business’s written expense policy will also come into play. If your policy states that you’ll reimburse certain expenses, you need to comply with your own rules.
Lastly, keep in mind reasonable accommodations for remote employees with disabilities.
2. Consider reasonable accommodations
You might provide remote work opportunities as a reasonable accommodation under the Americans with Disabilities Act (ADA). If you offer telework as a reasonable accommodation to a qualified individual with a disability, you cannot require them to pay for the associated remote work costs.
As such, you may need to reimburse them for the cost of things like:
- Internet access
- Increased electricity use
- A computer or other equipment
- An additional phone line
- An ergonomic chair
3. Evaluate what “necessary” means for your business
“Necessary” can mean different things to different people. For instance, you might have multiple customer service representatives who work remotely. Do they each need a handless headset to take calls with clients or customers? Yes. Do they need a complete noise-canceling, state-of-the-art model? Probably not.
You don’t want to limit your employees to cheap equipment that won’t provide the right functionality. However, the most expensive models usually aren’t necessary, either. Consider your company budget and the maximum amount you can afford to reimburse employees for certain expenses. Then, add those amounts to your expense policy to curb unrealistic reimbursement expectations.
4. Watch out for ordinary living expenses
There may be employees who try to take advantage of your reimbursement arrangements. Even if you don’t foresee this happening in your workplace, it’s best to put preventative measures in place just in case.
When it comes to remote expense reimbursement, you usually do not have to pay for ordinary expenses that the employee would have incurred regardless of whether they worked remotely. This includes living expenses like rent and mortgage.
5. Determine a way to reimburse remote employees for utilities
If you need to reimburse remote employees for utilities, providing monthly payments is generally permissible. However, you shouldn’t choose a number arbitrarily. Conduct some research and be sure you can justify your reimbursement amount.
It may make sense to compensate employees proportionally for work-related utilities. For example, you may decide to reimburse employees 30% of their utility bill since they work for roughly 30% of the week. So, if an employee’s bill is $90, you would reimburse them $30.
However, if the employee’s bill also includes television and other services, you may not need to reimburse them that much. If they split the bill with friends or family members, the amount you need to reimburse further decreases.
When in doubt, being a little more generous now can help you avoid potential labor code violations later. How much you’re required to reimburse may also vary depending on your state’s requirements. Check your local laws to ensure you stay compliant.
6. Consider tagging furniture and equipment as company property
You may need to reimburse remote employees for home office furnishings like:
- Computer hardware
These purchases are often considered company property, and you can ask remote employees to tag them as such. If they end their employment, you may ask them to send the furniture back to you.
Determine what’s most cost-effective for your business. If an employee lives on the other side of the country, the shipping costs may not be worth the trouble.
7. Explore other options
Reimbursement is necessary in many instances. However, you should also consider other, potentially more cost-effective, solutions.
You might already have a lot of equipment in stock. You may also be able to get bulk discounts on certain items or services. If you have multiple employees who need the same equipment, buying and shipping the items to them directly could be more affordable than reimbursing them for their own purchases.
Reasons to reimburse remote work expenses
Even if you aren’t legally required to reimburse employees for remote work expenses, you may still want to consider doing so.
When employees work from home, you save on overhead costs like facility and maintenance fees. But your employees need to pay for increased internet use and other services. They may look for ways to cut their costs. Slower internet connections or low-quality equipment could impact their performance and productivity. If you reimburse them for these expenses, though, they’ll be able to focus and work more efficiently.
Similarly, reimbursing remote workers can boost their morale and engagement. If you have employees who work in a collaborative office setting, you probably provide snacks, drinks, and other perks on a daily basis. Remote employees don’t have access to these benefits or the community they facilitate.
Reimbursing remote employees for similar treats (or giving them a monthly stipend) can help boost satisfaction and make them feel more connected to the rest of your company.
How a remote work reimbursement policy can help
Creating a business expense policy can help you stay compliant and consistent when reimbursing remote employees. If you already have a policy, revisit and update it with remote work in mind. If you don’t have a reimbursement policy yet, make one and share it with your employees.
Your policy should include:
- Allowable expenses
- Non-allowable expenses
- Procedures and timelines for submitting expenses
- Approval and reimbursement processes
- Consequences of non-compliance
- How your reimbursement process interacts with any stipends you provide
If you provide a stipend, your policy should also include some explanation of how you arrived at the stipend amount. This can help reduce any claims that the stipend isn’t high enough to cover your employer reimbursement obligations.
Are expense reimbursements tax deductible?
If you reimburse remote employees, your next question may be about taxability. Whether a reimbursement is taxable typically depends on what type of plan you use to reimburse employees: accountable, non-accountable, or per diem.
In general, reimbursements made under accountable and per diem plans are not taxable. However, reimbursements made under non-accountable plans usually are taxable.
So, how do you know what type of plan you have?
Accountable plans meet the following three requirements:
- Employees incur business-related expenses or incur expenses while performing services as an employee of your organization,
- Employees document the time and place of the expense, plus the expense amount and purpose, and then submit the information to you within a reasonable amount of time, and,
- You reimburse the employees, and they return any excess to you within a reasonable amount of time.
Reimbursements under accountable plans are not considered wages, and therefore are not taxed.
Non-accountable plans meet any of the following criteria:
- Employees do not need to submit expenses for approval or reimbursement within a reasonable amount of time,
- Employees do not need to return excess reimbursement to you within a reasonable amount of time, or
- You provide employee reimbursement that would be considered wages under other circumstances (like an allowance for travel)
Reimbursements under non-accountable plans are considered wages and are taxed as a result.
Per diem plans
Per diem plans are slightly more complex. These plans give employees a daily allowance for meals, transportation, and other expenses they might incur while traveling.
Allowances under per diem plans are generally not taxed. However, if the allowance you provide is greater than the Federally established per diem rate, the excess amount will be taxed.
Managing remote reimbursement with expense management software
The laws and compliance surrounding remote employee reimbursement can be challenging to navigate. The actual reimbursement process can also be difficult if you don’t have the right tools and technology in place.
It can be easy to misplace paper receipts and physical expense reports when you have remote employees spread out across the country. Expense management software reduces this risk and simplifies the expense process for remote and hybrid workplaces.
With an expense management solution like SentricHR, employees can take photos of receipts and submit them for approval right from their phones. Combined with a mileage calculator, data-driven insights, and automated approvals, you and your employees have everything you need to make strategic spending decisions.
If you aren’t ready to invest in software, make sure you have a clear expense policy. Creating some guidelines will make it easier to manage reimbursement from any location. Our free Business Expense Policy Template can help you get started!