Remote Work Reimbursement Policy: Rules, Steps, and Tips

A remote work reimbursement policy thoroughly describes how employers compensate their workers for job-related expenses they incur while working outside traditional offices. With hybrid and remote work models becoming increasingly popular, these reimbursement policies are no longer optional for employers who want to attract and retain top talent.

In this guide, we’ll talk about the laws, regulations, and tax implications of these policies. More than that, we’ll discuss how reimbursement works for employees and how it works for freelancers and contractors. Lastly, we’ll show you how to create an efficient employee reimbursement policy template for your business.

Remote Work Reimbursement Law and Regulation

There is no federal law that directly requires employers to reimburse remote work expenses. However, under the Fair Labor Standards Act (FLSA), an employee’s wage can’t fall below minimum wage due to work-related expenses that they have paid out of their own pockets.

For example, if an employee is required to purchase the necessary equipment (e.g., an expensive laptop or high-speed internet connection), those purchases must not reduce their average earnings below the federal minimum wage. In these cases, remote work reimbursement becomes mandatory to ensure at least the minimum wage for the worker.

Keep in mind that state laws can be stricter when it comes to remote work reimbursement. California, for instance, has one of the most stringent regulations under Labor Code 2802, which requires employers to reimburse all expenses employees incur while performing job duties.

This can include direct expenses (such as the purchase of equipment and materials), but also adequate percentages of home internet and cellular phone bills (even if the remote worker already possesses an unlimited data plan).

Illinois follows a similar model under the Wage Payment and Collection Act, with states like Montana, New Hampshire, North Dakota, and South Dakota mandating reimbursements regardless of the worker’s base salary.

On the other hand, states like New York and Iowa apply a conditional reimbursement standard. Under this model, employers are required to reimburse business-related expenses only if that is a part of a company’s policy. This means that reimbursements are left at the employer’s discretion, but once there’s a formal agreement, the employer must adhere to it.

Ultimately, laws and regulations that govern remote work reimbursements vary significantly between states. That means it’s essential to familiarize yourself with local rules before developing your remote work expense policy.

Remote Work Reimbursement for Employees (W-2 Workers)

Remote work reimbursement for W-2 employees is governed by a combination of federal and state laws, as well as internal company policies. In general, employers reimburse expenses employees incur that are reasonable and necessary for them to perform their job duties.

The most common method of reimbursing employee expenses is through payroll management. Here’s what a typical payroll reimbursement process looks like:

• An employee gathers and submits receipts or other supporting documentation to validate the expenses.

• They submit a properly categorized expense report along with the receipts to the employer.

• An internal manager, the finance department, or the employer reviews the documentation to verify and approve the claim.

• An employee is reimbursed with a payment that’s added to their regular paycheck or via a separate direct deposit.

It’s important to note that remote work reimbursement isn’t universal, and it doesn’t cover all expenses. The expense needs to meet several criteria to qualify as reimbursable, including being necessary, ordinary, and directly related to job performance.

Employers typically have the reimbursable expenses and categories explicitly defined in formal policies to ensure transparency and prevent ambiguity.

What Expenses Are Included?

Here are some of the most common expenses for remote W-2 workers:

• Internet and mobile phone bills. Many companies cover a percentage of an employee’s monthly plans for Wi-Fi and cell phone. As we’ve already mentioned, these reimbursements are legally required in some states, as long as the worker relies on their monthly plans to do their job.

• Home office equipment. These expenses encompass both costly hardware and everyday supply purchases. This includes everything from company laptops, monitors, and ergonomic office chairs to paper, printer ink, notebooks, and other consumables.

• Software and subscriptions. Costs of digital tools necessary for the job are also reimbursable. This can include one-time purchases of software, monthly subscriptions, fees for cloud storage, costs of antivirus software, and more.

• Travel and coworking spaces. If an employee travels to another place for a meeting or other business purpose, their employer will typically reimburse the expenses incurred. The same goes for officially authorized rent of a desk or an office at a local coworking place.

• Utilities (in some states). Depending on the state and the employer’s home office expense policy, an employee may receive partial reimbursement for their electricity or heating bill. California is known for being an employee-friendly state, requiring employers to reimburse electricity and heating/AC costs when used for remote work.

Remote Work Reimbursement for Freelancers and Contractors

Freelancer and contractor expense reimbursement rules are different compared to those for W-2 employees. These professionals are classified as self-employed, which means they aren’t covered by wage and hour laws like FLSA. As a result, they are fully responsible for the tools, equipment, software, and other resources necessary to do their job.

Because of that, remote work reimbursement for freelancers and contractors is entirely governed by their contractual agreement with the client. A company that hires an independent contractor isn’t legally required to reimburse their typical remote work expenses.

More than that, if an employer begins to treat a freelancer like an employee by regularly reimbursing their expenses as well as controlling how and when they do their job, they run a severe risk of worker misclassification. This can lead to significant financial penalties, back-tax payments, wage lawsuits, and other problems.

In practice, many self-employed professionals factor the expenses they incur while doing the work for the client into their rates or fees. However, some clients agree to reimburse certain expenses (e.g., the costs of specialized tools or traveling for a project).

Freelancers and contractors typically invoice clients for reimbursement. They can do that by:

• Bundling reimbursement into the project costs, which means it isn’t specifically mentioned on an invoice.
• Adding separate line items to an invoice to bill clients for the remote work overhead costs.

What Expenses Are Included?

Unlike W-2 employees, freelancers and contractors can claim a range of unreimbursed expenses as deductions to lower their taxable income. Still, when they agree on reimbursements with their clients, common categories include:

• Project-specific software. If a contractor needs to purchase software or a subscription just for the client’s project, they may typically bill them for reimbursement.

• Equipment purchase or rentals. Buying or renting project-specific gear like cameras, specialized hardware, or physical tools can be covered by the client.

• Travel expenses. It’s common for clients to pay for the contractor’s flight, accommodation, and meals if they require them to work off-site.

• Communication costs. Costs of international calls, mobile plans, and platform subscriptions used specifically when working on the client’s project are often subject to reimbursement.

Are Remote Work Reimbursements Taxable?

Remote work reimbursements are taxable if they are made under a non-accountable plan. If reimbursements are made under an accountable plan, they are tax-free for the employee. That said, here’s a quick accountable vs. non-accountable plan comparison:

The IRS has strict regulations that companies must follow if they want to reimburse employees under an accountable plan. Several key requirements need to be fulfilled under Treasury Regulation 1.62-2, and they are:

• The expense must have a direct connection with the business.
• The employee must substantiate the costs with appropriate documentation (receipts, invoices, mileage logs) within a reasonable timeframe (typically within 60 days).
• The employee must return any excess amount of the reimbursement that they receive within a reasonable timeframe (typically within 120 days).

If all three criteria are met, the reimbursement won’t appear on the employee’s Form W-2 income line and will be exempt from all taxes.

However, if reimbursements don’t meet one or more of the criteria, they will be made under non-accountable plans. For example, if an employer gives their worker a flat monthly $150 “remote work stipend” without asking for receipts or a return of the excess, the entire sum will be considered taxable income.

This means the employer must withhold payroll taxes from those funds, while employees must report that money as taxable wages on their annual return.

How to Create and Implement a Remote Work Reimbursement Policy

Developing a comprehensive remote work reimbursement policy protects your business and improves employee experience. Here are the key steps that will help you create a well-designed policy:

#1. Define Eligible Remote Work Expenses

The first step involves defining which remote employee expenses your organization is willing to cover. You should create a detailed and granular list of both approved and unapproved expenses to remove any ambiguity.

For example, you want to state whether your company covers a portion of home internet bills, cellular data plans, hardware, furniture, or even utility bills. On the other hand, it’s just as important to emphasize which costs your company won’t cover (e.g., home renovations, personal software subscriptions, coffee machines).

You can also implement a tiered model, where higher-level employees and senior professionals have access to a higher budget compared to entry-level associates.

#2. Choose a Reimbursement Model

A reimbursement model defines how the funds will be distributed to your employees. The two main models are:

• Fixed stipends. Fixed stipends involve giving employees a recurring allowance each month. While they are typically much simpler to implement and require minimal administrative work, most of them are made under non-accountable plans. As such, they will be added to an employee’s gross income and subjected to payroll taxes.

• Itemized reimbursements. An itemized model requires employees to submit receipts or other proof for each expense they want reimbursed. While this requires more administrative effort (as every expense needs to be verified), every dollar given to an employee can be tax-exempt.

#3. Set Documentation and Compliance Requirements

If you opt for the itemized reimbursements model, you need to clearly define which documentation employees need to submit (such as receipts, invoices, and usage logs). This is critical in ensuring compliance with IRS accountable plan rules, allowing you to deduct these expenses and avoid tax issues.

Your business expense policy for remote teams should also establish recordkeeping practices in cases of audits. It’s good practice to digitize everything to make the documentation easy to store, organize, and retrieve. You can also use dedicated bookkeeping software or expense management tools to facilitate the process.

#4. Establish an Approval Process

A clearly defined approval process is essential for efficient remote employee expense reimbursement. That’s why your policy needs to outline the workflow for submitting, reviewing, and approving expenses.

Additionally, you should also define the roles and responsibilities, and specify who is in charge of which part of the process (e.g., a manager or a finance team).

Finally, you want to set timelines for submitting claims, issuing reimbursements, and returning excess funds. This creates consistency, ensures compliance, and boosts employee satisfaction.

#5. Communicate the Policy Clearly to Employees

The final step in implementing your remote work reimbursement policy involves integrating it into your corporate system through clear communication. The policy should be easily available in an accessible format (e.g., in the form of an employee handbook or an online portal).

Beyond standard instructions, you should also include examples and an FAQ. If needed, you can also provide brief training to your new employees during their onboarding process. Should you make a change to the policy, you should hold a brief informational meeting to update all employees on the adjustments.

3 Best Practices for Employers

Here are three proactive strategies that will help you continuously maintain and optimize your reimbursement workflows, protecting your business from financial liability while ensuring a positive experience for your employees:

1. Standardize your policy, but adjust it for state laws. If your company operates in multiple states, you want to make sure that your policy is compliant with each state’s laws. That’s why you should set baseline work-from-home reimbursement rules that you can then adjust and adapt to comply with state-specific reimbursement requirements.
   
   
2. Automate employee expense tracking and reimbursement with software. Manually collecting receipts, verifying expenses, and issuing reimbursements takes time and is prone to errors. Instead, you can use expense management software (e.g., Ramp or Expensify) that also allows employees to scan receipts with their smartphones.
   
   
3. Regularly review and update your remote work reimbursement policy. Remote work is constantly evolving, and so the expenses and employees’ needs change. State laws are also subject to change. That’s why you should periodically audit your reimbursement rules and workflows to see if you need to modify or improve something.

Document and Track Remote Work Reimbursement with Paystub.org

Simplify your payroll and reimbursement tracking with Paystub.org. If your reimbursements are made under a non-accountable plan, you can easily add them as separate line items using our pay stub generator. The tool comes with ready-made templates and a built-in calculator to help you improve accuracy and generate these documents faster.

Following that, you can also use our Form W-2 generator to report these payments to the IRS and issue your employees their wage and tax statements.

Final Thoughts

A comprehensive and well-thought-out remote work reimbursement policy is a vital financial and compliance tool. On the one hand, it protects your employees by ensuring they always have the necessary funds to do their job. On the other hand, it keeps your business aligned with federal and state rules and regulations.

Remember to communicate your policy to your employees and to make sure they follow the protocol. This will allow you to keep your reimbursements under an accountable plan. Finally, regularly review your policy and workflow to see if you need to make any changes.

Remote Work Reimbursement FAQs

#1. Do companies have to reimburse remote employees?

Under federal law, companies have to reimburse remote employees only if their earnings drop below minimum wage due to out-of-pocket, business-related expenses. Some state laws can be stricter, requiring employers to reimburse all the necessary expenses that remote employees incur while working for their company.

#2. How do I record reimbursements on a pay stub or invoice?

To record reimbursements on a pay stub for W-2 employees, add them as a separate non-taxable line item. For 1099 independent contractors, remote work expenses should be included in an invoice and billed directly. They can be included as standalone items or incorporated into the gross amount.

#3. Can I get reimbursed for my internet if I work from home?

Yes, you can get reimbursed for your internet if you work from home. In states like California and Illinois, employers are legally required to reimburse you an appropriate percentage of your monthly plan. If your state doesn’t have laws like this, the reimbursement is up to the employer.