In April 2020, an incredibly 70% of the US workforce was operating remotely. More than a year on, businesses across the country have taken the opportunity to re-examine their working arrangements. For some, it was just temporary, but many companies will never go back to how they were before.
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 won electricity, internet and (often) office supplies. What portion of these 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, ten states (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, and South Dakota. To help employers, we’ve put together a chart listing states with remote employee reimbursement laws and what expenses must be reimbursed.
Remote Employee Reimbursement Laws
|State||What 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. tit. 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 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 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. Cent. Code. 34-02-01|
|Pennsylvania||Employees can claim unreimbursed expenses as deductible according to Pennsylvania Personal Income Tax law.||43 Pa. Stat. Ann 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|
What Counts as a Necessary Cost?
The big question for businesses in these states is which expenses will count as essential. The reality is, it’s open to interpretation. Generally, businesses aren’t required to pay expenses when workers choose to work remotely. If remote work is mandated, however, a variety of different costs may need to be reimbursed.
A necessary expense is anything required for the performance of an employees’ 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 most employee-friendly state, California, employers may even be required to pay a portion of home utilities, such as air conditioning.
Even if your state does not mandate reimbursement, experts recommend offering some type of reimbursement policy because it helps build loyalty and morale among your employees.
In this case, it is also recommended that you 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.
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 period of time (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 time (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.
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.
The IRS Publication 15 and Publication 535 have more details about the tax implications of business expenses and reimbursements.
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.
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