• Sep 02, 2026 wisecpa

Employee Expense Reimbursements: What Small Business Owners Need to Know

Tax laws change, and keeping up with those changes can be challenging for any small business owner. One area that continues to create questions is how work-related employee expenses are handled.

For businesses with employees, understanding the difference between employee reimbursements, taxable income, and deductible business expenses can help you avoid unnecessary tax headaches—and potentially save money.

At Wise Business Solutions, we help small business owners understand not only what the tax rules say, but how those rules apply to the way their business actually operates.

What Happened to the Employee Expense Deduction?

Under the Tax Cuts and Jobs Act (TCJA), the federal deduction for unreimbursed employee expenses was eliminated for most employees beginning in 2018.

Previously, employees who paid certain work-related expenses out of their own pockets could potentially claim those costs as miscellaneous itemized deductions, subject to specific limitations.

Expenses could include things such as:

• Work-related meals and travel

• Lodging

• Tools and supplies

• Professional dues

• Licensing fees

• Work-related education

• Required work clothing and equipment

For employees who regularly paid these expenses themselves, losing the deduction could make a meaningful difference at tax time.

What Does This Mean for Small Business Owners?

This change is also something employers should understand.

If your employees regularly pay for legitimate business expenses out of their own pockets, you may want to consider whether reimbursing those expenses makes sense for your business.

A properly structured reimbursement arrangement can be beneficial for both the employer and the employee.

A Win-Win for Employers and Employees

Instead of increasing an employee’s salary to compensate them for business expenses, an employer may be able to reimburse qualified expenses directly.

When handled correctly, the business may generally deduct eligible reimbursements as a business expense, while the employee may receive the reimbursement without it being treated as taxable wages.

That can make reimbursement a more tax-efficient solution than simply increasing an employee’s compensation to cover the same costs.

What Is an Accountable Plan?

If your business reimburses employees for expenses, it’s important to follow IRS requirements for an accountable plan.

Generally, an accountable plan requires that:

1. The expense has a legitimate business connection.

2. The employee adequately accounts for the expense within a reasonable period.

3. The employee returns any excess reimbursement within a reasonable period.

When these requirements are met, qualifying reimbursements generally aren’t treated as taxable wages to the employee.

The details matter, though. Simply handing employees money for expenses doesn’t automatically make the reimbursement tax-free or deductible.

What Should Small Business Owners Do Now?

If your business has employees who regularly incur work-related expenses, take a closer look at how those expenses are currently being handled.

Ask yourself:

• Are employees paying for business expenses out of pocket?

• Are those expenses being reimbursed?

• Do you have a written reimbursement policy?

• Are employees submitting receipts and documentation?

• Are reimbursements being recorded correctly in your accounting system?

• Are you confident your reimbursement process follows IRS requirements?

If the answer to any of these questions is “I’m not sure,” it’s worth reviewing your process.

Talk to a Delaware Small Business Accountant

Tax rules are complicated, but your business’s accounting system shouldn’t make them more complicated than they need to be.

Working with a Delaware small business accountant can help you establish practical systems for employee reimbursements, expense tracking, payroll, and tax planning.

At Wise Business Solutions, we work with small business owners to look beyond simply preparing a tax return. Our goal is to help you understand the numbers behind your business and make informed decisions throughout the year.

If you’re unsure whether your employee reimbursement process is working for your business, let’s take a look.

Wise Business Solutions — getting you where you want to be.