Are Expense Reimbursements Considered Taxable Income?

The IRS considers some employee benefits to be taxable income. But, do employee expense reimbursements fall into that category?

Question

I work for a small company, and employees don’t have corporate credit cards.

Recently my boss asked me to travel to another city for a conference. She explained I have to use my credit cards for the plane tickets, hotel, and meals, and the company would reimburse my travel expenses after the trip.

Naturally, I was a bit grumpy using my cards. Pushing my credit card balances toward their credit limits might raise my credit utilization percentage, which could negatively impact my credit score.

On the plus side, I have loyalty rewards credit cards, so I might accrue miles and points by using them for business travel. I could then use those points for discounted personal travel.

My boss explained that the company would reimburse me for the travel expenses on the next payday.

Will I owe taxes on the amount of the reimbursement?

Answer

In short, no. But that’s provided your employer completes the pay stub accurately as part of their expense reimbursement process. If they incorrectly lump the reimbursed amount with your wages, it’s taxed.

Talk to your accounting department before your employer reimburses you. The “Gross Pay” section of your pay stub shouldn’t list the reimbursed amount.

Your pay stub should have a separate section for reimbursed amounts that are not subject to taxation. Your total expenses must be paid on a pass-through basis and not reduced by taxes or other deductions.

Claiming Unreimbursed Employee Expenses

On the other hand, let’s say your employer didn’t reimburse you.  You’d be really grumpy.

However, if you itemize deductions on your annual tax return, you may claim those unreimbursed employee expenses as part of your miscellaneous expenses on Form 1040, Schedule A, Itemized Deductions.

Some specific miscellaneous expenses are tax deductible, but only to the extent they exceed two percent of your adjusted gross income (AGI). For example, if your AGI is $50,000 and your miscellaneous expenses total $3,000, you can only deduct $2,000. That’s because the first $1,000 is two percent of your AGI.

Unreimbursed employee expenses are deductible if they meet these criteria:

• Paid or incurred during the tax year
• For carrying on your trade or business of being an employee
• Ordinary and necessary

The Bottom Line with Expense Reimbursements

Make sure your employer completes your pay stub correctly to reimburse your travel expenses. Otherwise, you might improperly pay more taxes.

Deducting the business expenses on your tax return is not the same as getting a tax credit. It does not directly reduce the amount of taxes you owe. And, the number of deductible expenses is limited.

If you don’t itemize your deductions on Schedule A, you must take the standard deduction, which might not adequately cover your expenditures for the business trip.

The best path is for your employer to pay your expenses separate from your wages. Safe travels!