Introduction

Since the Tax Cuts and Jobs Act (TCJA) of 2017, employees can no longer deduct unreimbursed business expenses on federal income tax returns. This change emphasizes the importance of understanding and utilizing tax-free reimbursements, especially as the work landscape shifts towards remote settings. 

This article explores how employees who work from home can benefit from reimbursements for expenses related to their home offices, telecommunication, vehicles, and more.

Understanding tax-free reimbursements

A tax-free reimbursement is a payment from an employer to an employee for business expenses the employee incurs which don’t count as taxable income. To qualify as tax-free under IRS rules, reimbursements must be part of an “accountable plan” which requires expenses to have a business connection and be substantiated by the employee while ensuring any excess reimbursements are returned to the employer.

Categories of potentially reimbursable expenses

The following categories can often be reimbursed tax-free, with significant financial benefits for employers and employees alike.

Home office expenses

For those who work remotely, the home office is the principal place of business for meeting clients and customers. Expenses related to the home office — such as utilities, rent, or real estate taxes — may be reimbursed tax-free if they meet certain criteria. Direct expenses can generally be reimbursed 100% tax-free, and indirect expenses can often be reimbursed based on the business-use percentage. 

Telecommunication expenses

In today’s digital age, reliable internet and telecommunication tools are essential for remote work. Employees can receive tax-free reimbursements for internet services, necessary software subscriptions, and cell phone plans — if these tools are primarily used for business purposes. Telecommunication expenses are generally considered direct expenses because the personal-use component is minimal (“de minimis”).

Transportation and vehicle expenses

If an employee’s home is their “tax home,” then transportation expenses like mileage or the cost of transportation to a temporary work location or client site can be reimbursed tax-free. It’s crucial to track and substantiate these expenses accurately. When an employee typically works from home, it’s not uncommon for all business-related mileage to be reimbursed tax-free. 

Equipment and supplies

Office supplies, furniture, and other equipment needed to perform job duties purchased by the employee can also be reimbursed tax-free under an accountable plan. This includes items like printers, computers, and ergonomic chairs. Again, if these expenses are considered directly related to your job, they can generally be reimbursed 100% tax-free. 

Strategies for employees

Documentation and record-keeping

Keeping meticulous records is crucial for substantiating the business use of any expense. Receipts, logs, and detailed notes should be maintained to ensure compliance with the accountable plan requirements.

Employer communication

Open communication with employers about setup and adherence to an accountable plan is key. Employees should understand what can be reimbursed and the process for submitting expenses. 

Regular reviews

Reviewing employment contracts and reimbursement policies on a regular basis helps employees stay informed about covered expenses and changes in company policy.

Benefits of tax-free reimbursements

Financial

Tax-free reimbursements can significantly reduce employees’ out-of-pocket expenses, effectively increasing their disposable income without increasing their tax liability.

Tax efficiency

Reducing taxable income through tax-free reimbursements empowers employees to achieve a more efficient tax status, potentially lowering their overall tax burden. Employers also save money because reimbursements are not subject to payroll taxes.

Morale and productivity

A comprehensive reimbursement policy enhances employee morale and productivity by reducing the economic pressure on employees, enabling them to focus on their work instead of finances.

Conclusion

In the current landscape where remote work is the new norm, understanding and utilizing tax-free reimbursements is more crucial than ever. Employees should take proactive steps to manage their business expenses and ensure they’re making the most of the benefits available to them.

For more information, employees can refer to the IRS Publication 5137, Fringe Benefit Guide, which provides additional details on accountable plans and other tax-related issues.