Travel Expense Reimbursements for Employees: A Guide for Businesses

What you need to know about travel expense reimbursements

A travel expense reimbursement is a payment made by an employer to an employee to cover costs incurred during business travel. 

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While not mandatory at the federal level, some states require that employers reimburse their W-2 employees for ALL business-related expenses, which of course includes travel. 

These expenses usually are:

• Mileage: Reimbursing employees for business miles driven in a personal vehicle
• Lodging: Hotels, motels, or short-term rentals
• Airfare: Costs of flights, including tickets, baggage fees, and other related expenses
• Transit: Bus, train, ferry, or other public transportation fare, as well as taxis and rideshare services
• Vehicle expenses: Rental cars or car-sharing services, fuel, parking and toll fees
• Meals and client entertainment: Expenses for meals and entertainment directly related to business (this category is subject to stricter IRS guidelines)

Other expenses, like WiFi hotspots and SIM cards may also count toward travel expenses, as long as they’re considered necessary for your business and are an ordinary expense for someone in your industry. 

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Rules for travel expense reimbursements

As mentioned earlier, some states, including California, Illinois, and Massachusetts require employers to reimburse staff for all out-of-pocket business expenses. 

Outside of states where travel expense reimbursements are mandatory, you get to decide which expenses you can or should reimburse. 

Some things to keep in mind:

• Tax-free reimbursements need to follow IRS guidelines: some text
  • Expenses need to be “ordinary and necessary” for your business
  • You’ll need to include travel expenses in an accountable plan — that means employees will need to provide proof of their expenses for reimbursements.

• All other travel reimbursements (like per diem and lump sum payments) will need to be taxed at the regular income tax rate 

How to reimburse employees for travel expenses

You have two options for reimbursement: tax-free or taxed.

How tax-free travel reimbursements work

Tax-free travel reimbursements need to make sense for your business (that’s the “ordinary and necessary” mentioned above) and your employees will need to track and report expenses along with receipts. 

For example, if an employee drives to a regional conference for two days, they’ll need to save their hotel booking page, along with meals and any business-related purchase receipts (e.g. supplies), and track mileage for reimbursement. 

That’s a lot of paperwork, which gets progressively complicated and burdensome for employees that travel far and often.

Most businesses choose to solve this problem with an expense tracking software, and in the case of mileage, a mileage tracking app like MileIQ. 

MileIQ tracks all employee drives automatically, so they don’t have to stop and log every drive by hand. Even better, it generates reports with a tap and lets employees send in their mileage (along with parking and toll fees) to you without ever looking at an expense spreadsheet. 

How taxed travel reimbursements work

Taxed travel reimbursements are usually given to employees before an anticipated expense, or may even be a regular part of their compensation. These are usually lump sum payments or per diem amounts which can be spent by the employee without proof of expenses. 

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Some businesses may prefer this strategy because it doesn’t require as much record-keeping. But there are tangible downsides:

• Because these travel reimbursements are taxable the actual amount employees get may not feel sufficient —  or in fact be insufficient, especially if they’re traveling to an area with higher costs of living. If you live in a state that requires employee reimbursements you’ll need to do extra research in order to accurately cover employee travel expenses after tax.
• You’ll lose out on tax benefits by not treating employee travel reimbursements as a business expense which can be deducted on your company tax return. 

In case of business mileage, you may still be able to reimburse employees tax free if you use the standard mileage rate provided by the IRS. You can also choose to reimburse at a higher rate, but will need to deduct taxes on any amount that goes over this standard rate. 

Using a mileage tracking app is helpful no matter which reimbursement method you choose. For example, an app like MileIQ defaults to the IRS standard rate — which is helpful if you’re tracking mileage as a non-taxable reimbursement. You can also customize the rate to be higher and ask employees to track their mileage purely for fair reimbursement purposes.