How to Reimburse Home Office Expenses for Employees of S Corporations

March 4, 2024

If a business is taxed as an S corp, there are tax laws that let them deduct the home office expense reimbursements paid to their employees. To do so, the IRS requires that the S corp manage the employee expense reimbursements under an “accountable plan”.

How to reimburse employee expenses under an “accountable plan”

1st: Write a policy for the S corp that defines how employee expenses are reimbursed. The IRS does not require a written policy, but it is simple to do and helps if your reimbursement expenses are questioned in an audit or court room.
2nd: Employees must pay their own expenses from their personal bank accounts.
3rd: Employees must submit reimbursement requests with detailed receipts within a reasonable amount of time. We recommend monthly or quarterly.
4th: The S corp must pay the reimbursement requests within a reasonable amount of time. We recommend it within 30 days. The S corp can pay the reimbursement as a separate ACH transfer or it may be included with payroll processing, as long as the reimbursement amount is clearly stated on the paystub.
5th: Employees receive their reimbursements tax free. In other words, they are not subject to income taxes or payroll taxes because they are not wages.
6th: The S corp deducts the home office reimbursement expenses on their annual income tax form.

Your accountant should be able to provide you with a templated policy and reimbursement form. If you want to see the templates that Colvin CPA uses, just ask by sending an e-mail to [email protected].

Which home office expenses can be reimbursed to employees?

The employee’s home office must be used “regularly” for the business. In other words, being in their home office is part of the employee’s work routine. Consider an employee that uses the sun room in their home to create workshops but delivers the workshops to client’s offices. The employee’s sun room is where critical business activities are routinely performed. Even though the employee performs work in other spaces, their sun room is used regularly for the business.

The employee’s home office must be used “exclusively” for the business. In other words, the space is not used for any personal purpose. Consider an employee who uses the guest room in their home to do their work. Their desk space converts to a murphy bed for their guests. The employee’s guest room is not used exclusively for business so this does not count as a home office.

The employee’s home office must be their “principal place” of doing business. In other words, the employee can only request reimbursement for expenses of one office location. Consider an employee who needs to get away from home distractions and does most of their work at a rented office space outside of their home. Occasionally, that employee may work from their home office that is set up in their guest room. The employee can only request reimbursement for the one location that is their principal place based on the amount of time spent at each location and the importance of the activities performed at each. In this case, the employee does not have a deduction for their home office because they have a deduction for their rented office space.

Home office expenses fall into 3 categories; they are direct, indirect and unrelated. Direct expenses only benefit the home office space and are 100% deductible. An example is putting a fresh coat of paint on the office walls. Indirect expenses benefit the entire home and are deductible based on a square footage percentage. For example, a home office that is 200 square feet of a 2,000 square foot home, may deduct 10% of the utilities, home insurance, security system, cleaning fees, exterminator fees, rent, mortgage interest, property taxes and repairs. Unrelated expenses do not provide any benefit to the home office and are not deductible. For example, fresh paint for the family den or a subscription to the Disney channel for family movie night.

What if employees don’t provide receipts for their reimbursable expenses?

The IRS has historically viewed an expense reimbursement without receipts as a “non-accountable plan” and requires them to be reported as wages on the employees W-2. As wages, they will be subject to income taxes and payroll taxes.

The IRS requires receipts for an “accountable plan” because the employer must pay the exact reimbursable amount. In other words, the employer cannot just provide a home office stipend. If an employee is accidentally reimbursed too much money, the employee must return the overpayment or it must be reported as wages.

How can we make it easier to reimburse home office expenses to employees?

Whether you long to ride your bike on the warmer days ahead or finally bring that new workshop idea to fruition, spend your time doing what you want, not struggling through tax compliance. Let Colvin CPA’s expertise guide you through the tax law requirements.

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