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Navigating Remote Work Reimbursements: Taxable vs. Tax-Free Strategies

Your team is working remotely, and they have expenses like internet, home office equipment, and possibly extra phone charges. As a considerate employer, you aim to reimburse these costs.

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However, the method you choose to reimburse them will make a significant difference. There are two primary routes to consider:

Route 1: Simplified Approach — Taxable Reimbursements

In this approach, you might provide a routine payment, like a $150 monthly remote work stipend via payroll. This straightforward method lets everyone know their expected payment.

However, this reimbursement is considered taxable income, meaning:

  • The company incurs payroll taxes.
  • The employee is responsible for income tax.
  • These payments appear on the employee's W-2, similar to their salary.

While convenient, it can become costly. From a $150 stipend, employees might only receive around $100 after taxes.

Route 2: The "IRS-Approved" Method — Accountable Plans

Opting for an accountable plan allows you to reimburse employees tax-free.

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This tax advantage means:

  • No payroll taxes.
  • No income taxes.
  • There is no need for W-2 reporting.

Companies can still deduct these expenses, and employees retain the full reimbursement. The downside is the need for documentation. Employees must submit receipts, logs, or statements, and any advanced funds not spent should be returned. Compliance is simple but demands a robust process.

For more details, visit the IRS Accountable Plans documentation.

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Which Strategy is Best for You?

This decision hinges on your team's dynamics and willingness to manage additional administrative tasks.

  • Avoid chasing down receipts? Opt for a taxable reimbursement for simplicity.
  • Maximize employee take-home pay and minimize tax burdens? An accountable plan may be ideal, albeit requiring some setup.
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Additionally, certain states, such as California, mandate reimbursement for necessary business expenses. Without a proper plan, your company could face compliance challenges.

Pro Insight: Stratify Your Reimbursements

Not all employees require the same reimbursement level. Structure tiers such as:

  • Base level: Covers internet and phone expenses.
  • Intermediate level: Includes office equipment in addition.
  • Executive level: Encompasses travel and specialized tools.

Provided these expenses are documented and business-related (under an accountable plan), the IRS will be satisfied.

Conclusion

Choose between a straightforward taxable approach and a compliant, tax-efficient method. Both options have their merits, depending on your business goals and obligations.

With remote work ever more prevalent, proactively addressing reimbursement setups can protect against unnecessary taxes or ensure your team enjoys financial efficiency.

Action Plan

Our firm is ready to assist you in selecting the optimal reimbursement strategy for your company, be it setting up an accountable plan or refining a taxable stipend. Contact us for guidance and make this a non-issue for your business.

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Our team is standing by to help!
Reach out now
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