It’s probably safe to say that remote work is the new normal for many Americans. Today, more than 27.6 million people work from home as opposed to the roughly 9 million people in 2019 (American Community Survey). And, those who don’t would like to. 98% of respondents in Buffer’s 2023 Remote Work Survey of 3000 would like to work remotely for the rest of their careers (Buffer).
Remote-first organizations can make big savings on real estate—but are they required to instead pay for remote employees’ expenses? When employees work from home, they use their own electricity, internet and (often) office supplies. What portion of these business-related expenses are, or should be, reimbursable?
Federal Law on Employee Reimbursement
Federal law states that an employer only needs to reimburse their employees for work-related expenses that drop their earnings below the minimum wage. However, 11 states (as well as Seattle, Wash. and Washington D.C.) currently have laws requiring employers to reimburse employees for certain remote work expenses: California, Washington D.C., Illinois, Iowa, Massachusetts, Minnesota, Montana, Hampshire, New York, North Dakota, Pennsylvania, South Dakota, and Washington. To help employers, we’ve put together a chart listing which states have remote employee reimbursement laws and which expenses must be reimbursed.
Remote Employee Reimbursement Laws
| State | Which Expenses Must Be Reimbursed? | Applicable Law |
| California | “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” | Labor Code Section 2802 |
| Washington D.C. | “the cost of purchasing and maintaining any tools required of the employee in the performance of the business of the employer.” | D.C. Mun. Regs. title 7 § 910 |
| Illinois | “all necessary expenditures or losses incurred by the employee within the employee’s scope of employment and directly related to services performed for the employer.” | Wage Payment and Collection Act |
| Iowa | “Expenses by the employee which are authorized by the employer and incurred by the employee shall either be reimbursed in advance of expenditure or be reimbursed not later than thirty days after the employee’s submission of an expense claim.” | Iowa Code 2022 91A.3(6) |
| Massachusetts | Employers should reimburse expenses that are “unavoidable and necessary” for employees to fulfill their job responsibilities, according to guidance by the Massachusetts Attorney General’s office. | Massachusetts General Law Chapter 149, § 148A |
| Minnesota | “An employer, at the termination of an employee’s employment, must reimburse the full amount deducted, directly or indirectly, for… purchased or rented equipment used in employment, except tools of a trade, a motor vehicle, or any other equipment which may be used outside the employment; …. consumable supplies required in the course of that employment.” | Minnesota Statute 177.24(4)-(5) |
| Montana | “for all that he necessarily expends or loses in direct consequence of the discharge of his duties as such or of his obedience to the directions of the employer.” | Montana Code 39-2-701 |
| New Hampshire | “An employee who incurs expenses in connection with his or her employment and at the request of the employer, except those expenses normally borne by the employee as a precondition of employment, which are not paid for by wages, cash advance, or other means from the employer, shall be reimbursed for the payment of the expenses within 30 days of the presentation by the employee of proof of payment.” | New Hampshire Revised Statutes Title 23 275:57 |
| New York | Employers must pay any “benefits or wage supplements”, including reimbursement “for business-related expenses”, that have been promised to an employee. | New York Labor Law 198-C |
| North Dakota | “An employer shall indemnify the employer’s employee, except as prescribed in section 34-02-02, for all that the employee necessarily expends or loses in direct consequence of the discharge of the employee’s duties.” | N.D. Century Code. 34-02-01 |
| Pennsylvania | Employees can claim unreimbursed expenses as deductible according to Pennsylvania Personal Income Tax law. | 43 Pa. Stat. § 260.3 |
| South Dakota | “all that the employee necessarily expends or loses in direct consequence of the discharge of the employee’s duties.” | SDCL § 60-2-1 |
| Washington | Reimbursements are at employer’s discretion. Unreimbursd expenses may be tax-deductible. | Wash. Dept. of Labor & Industries |
| Seattle, Wash. | Employers must pay all employee compensation owed, including business expenses and remote work expenses. | Seattle Wage Theft Law |
What Counts as a Necessary Cost?
The big question for businesses in these states is “Which work-related expenses count as essential?” The reality is, the answer is open to interpretation. But here are some things to consider when making a decision:
Mandated or Remote
Remote employee reimbursement typically applies only when working from home is required by the employer rather than chosen by the employee.
If employees have the option to work on-site where the company provides necessary equipment and resources, work from home compensation for home office expenses may not be mandatory under most state laws.
However, when remote work is the only option available—whether due to company policy, office closures, or specific job requirements—employers in states that require cell phone reimbursement and other expense coverage must reimburse employees for necessary business expenses incurred at home.
Necessary Expenses
A necessary expense is anything required for the performance of an employee’s job. This depends on the work performed, but reasonable reimbursable expenses will likely include: internet services, mobile data usage, laptop computers or tablets, and equipment such as copiers and printers. In the employee-friendly state, California, employers may even be required to pay a portion of home utilities, such as electricity.
Types of Remote Employee Reimbursement
The Internal Revenue Service (IRS) classifies reimbursement plans into two categories: accountable and nonaccountable, each with different requirements and tax consequences:
Accountable Plan
An accountable plan is an IRS-approved reimbursement structure that allows employers to reimburse employees for work-related expenses without those payments being considered taxable income.
Accountable Plan Reimbursement Examples
This approach lets companies provide reimbursements on the following items without adding to employees’ tax burden:
- Internet
- Cell phone expenses
- Home office supplies
Non-Accountable Plan
Non-accountable plans are reimbursement arrangements that don’t meet IRS criteria for accountable plans and result in payments being treated as taxable wages. This occurs when employers provide work from home reimbursement without requiring documentation or fail to enforce return of excess funds.
Under a non-accountable plan, all reimbursements must be included on the employee’s W-2 form and are subject to federal, state, and payroll taxes.
Note: Employers should be particularly cautious with non-accountable arrangements in states that require cell phone reimbursement or have specific work from home reimbursement laws by states, as failing to properly structure WFH reimbursement could result in tax complications and compliance issues.
How to Make Remote Employee Reimbursement Policy Guidelines
Even if your state does not mandate reimbursement to remote employees, it’s a good policy to offer some type of reimbursement because it helps build loyalty and morale among your employees.
When you offer expense reimbursement, it’s important to develop general guidelines around reimbursement to avoid confusion or unequal application. Specifically, you should identify what is considered a necessary expense to be reimbursed and what is not.
It’s also important to determine your state’s tax rules regarding reimbursements and how they will impact your company’s and your employees’ taxes. Determining if you will need to pay taxes on expense reimbursements depends on whether you use an accountable or nonaccountable plan.
Accountable Plan
In order to qualify for an accountable plan, the employer’s reimbursement or allowance arrangement must follow all three of these rules:
- Business connection: All ordinary and necessary business expenses must have been paid or incurred while performing services as an employee.
- Substantiate expenses: There must be accounting with substantiation (date, place, amount, purpose) made within a reasonable timeframe (60 days). For this, employees will be required to submit a reimbursement form.
- Return unsubstantiated amounts: Any excess reimbursements or allowances must be returned within a reasonable timeframe (120 days).
Since accountable plan reimbursements aren’t considered wages, they aren’t subject to taxation and are also deductible by the employer as business expenses.
If any of these conditions are not met, the reimbursements are treated as supplemental wages, subject to applicable taxes and will also need to be reported on the employee’s W-2 form.
Nonaccountable Plan
A nonaccountable plan treats any reimbursement or other allowance arrangement as supplemental wages and subject to taxes. Reimbursements are considered nonaccountable if:
- The employee fails to properly substantiate expenses in a reasonable amount of time.
- The employee fails to return excess reimbursements or allowances in a reasonable amount of time.
- The employer advances or pays an amount to an employee regardless of whether they expect the employee to have business expenses.
- The reimbursement would have otherwise been paid as wages.
IRS Publication 15 and Publication 535 have more details about the tax implications of business expenses and reimbursements.
How Paycor Helps
For many companies, managing expenses used to require generating paper reports, keeping receipts, and undergoing a time-intensive approval procedure. With the transition to remote work environments, travel-related expenses have also been augmented with work-from-home costs such as office supplies, equipment, and Wi-Fi reimbursement. As a result, many businesses are adopting automated expense management systems, which has resulted in an increase in the use of third-party providers. However, it’s important to exercise caution when selecting an integrated solution since employees and managers may need to learn a new system, resulting in additional effort and the possibility of mistakes.
Paycor’s integrated expense management software streamlines the process for employees to input qualified expenses, for frontline managers to approve them, and for payroll administrators to arrange reimbursement. Employees save time and reduce errors by snapping pics of receipts and using OCR technology to read, extract, and populate key information to their expense reports. And they can submit expense reports anywhere, anytime via the Paycor Mobile App.
Paycor is not a legal, tax, benefit, accounting or investment advisor. All communication from Paycor should be confirmed by your company’s legal, tax, benefit, accounting or investment advisor before making any decisions.
FAQs About Remote Work Reimbursement to Employees
Have more questions about remote employee reimbursement? Read on!
Are employers required to have an expense reimbursement policy?
No, an expense reimbursement policy is not required but it is highly recommended. There is no federal law requiring employers to have a policy related to remote work reimbursement, but some states require it. And even if your state does not mandate reimbursement, a reimbursement policy will help manage expectations with your employees.
Will offering a remote work stipend help in attracting employees?
Maybe. Offering a stipend can be an attractive benefit to prospective employees, especially when they are weighing their options and comparing benefits packages. SHRM found that 62% of organizations they polled for their 2022 Employee Benefits Survey said they offer employees a stipend or reimbursement for work equipment. If you’d like to set yourself apart from the competition, it may be a good idea to be one of those companies.
Do companies pay for internet for remote employees?
Whether companies pay for internet for remote employees depends on where the worker is located. Under federal law, employers are only required to provide internet reimbursement if the cost would reduce an employee’s pay below minimum wage. However, work from home reimbursement laws vary by state significantly.
California, Illinois, Massachusetts, Montana, New Hampshire, New York, and several other states require employers to reimburse necessary work-related expenses, which typically includes internet costs for remote workers.
Do companies have to reimburse cell phones for remote employees?
It depends! Cell phone reimbursement laws differ across the country—with no universal federal requirement for remote employee reimbursement.
Which States Require Cell Phone Reimbursement for Employees?
The states that require cell phone reimbursement include: California, Illinois, Massachusetts, Montana, New Hampshire, New York, Iowa, Washington D.C., and Washington state, where employers must cover necessary business expenses. The key factor is whether the cell phone expense is considered essential for performing job duties—if it’s required for work, these states generally mandate reimbursement through their employee expense reimbursement laws.
In what ways can employers fulfill obligations to reimburse expenses?
Employers have several options for reimbursing remote work expenses. Expense reports can be reimbursed through a separate check, direct deposit, or sent through payroll using expense management software. But employers should be sure to consider tax implications when determining the best route for their business.