Payroll in Practice: 6.9.2025

Question: An employer is considering establishing an employee expense allowance arrangement to cover daily expenses for employees who travel to work at remote job sites. This allowance would be like a per diem travel and meal allowance but would cover use of the employee’s personal property such as a computer, camera, cell phone, safety equipment, disposable tools, and other equipment. What are the payroll considerations for such a plan?

Answer: The considerations are similar to those relating to expense allowances for employees who work from home and tool allowances for mechanics. The first consideration might be whether to reimburse employees for use of their property or for the employer to provide the necessary items to the employees under an employee tool and equipment plan. IRS Private Letter Ruling 200930029 discusses the requirements for plans that reimburse employees for use of their own property.

There may be considerations that fall outside of payroll, such as data security issues when employees use their own computers, cameras, or cell phones. The Federal Trade Commission recommends, in its Publication 0136, Protecting Personal Information, that businesses know where sensitive information is stored, whether on laptops, employees’ home computers, flash drives, digital copiers, or mobile devices.

Any allowance, reimbursement, or employer provision of facilities must be made under an accountable plan, which has three basic requirements.

First, there must be a business connection for the expenditure. The plan may provide payments to employees only for expenses allowable as business deductions that are incurred by the employee in performing services as an employee of the employer.

Second, employees must provide adequate and timely substantiation for each expenditure. Generally, this includes the amount, place, time or date, and business purpose for each expense. Additional information may be required for certain expenses, like mileage data for business use of a personal automobile, a usage log for listed property, or a list of attendees for a business meal or entertainment.

Third, employees must be required to return, within a reasonable period, any reimbursement or advance exceeding the substantiated expenses.

Treasury regulations require that documentary evidence, such as receipts or paid bills substantiates amounts spent on lodging while traveling as well as any other expenditure of $75 or more. Employers have the option to require receipts for amounts less than $75.

However, receipts or paid bills might not establish the amount for some expenditures, such as additional utility costs related to working from home, business use of a personal cell phone, or use of listed property such as a video camera. For utility costs or use of listed property, the employer must document how the reimbursement amount was determined.

For example, current utility usage during work from home periods could be compared to periods when there was no work from home. The reimbursement amount could be reasonably calculated by multiplying the increase in usage units by the current unit rate.

For business use of a personal cell phone, the IRS advised its auditors that “reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone.”

For a video camera, business and personal use could be documented in a log or determined based on the number of minutes of business video content divided by the total minutes of content.

Per diem and standard mileage rates may be used to document employee expense amounts that reasonably approximate actual expenses. This can simplify the recordkeeping process by reducing the need for receipts to document amounts spent on business use of a personal vehicle and values of travel meals, lodging, and certain incidental expenses.

Receipts, including those for lodging, are not required for expenses reimbursed under per diem plans. Employers may use the federal maximum per diem rate method, the high-low method, or set their own per diem rates. If the employer’s per diem exceeds the federal maximum rates, any amount of reimbursement over the federal maximum rate must be included in employees’ taxable income.

Employers may also set standard rates for other expenses but must be careful to document how the reimbursement is calculated so that it reasonably approximates the expenses the employee actually incurred for each expense.

While the IRS is concerned with tax compliance, the Labor Department’s Wage and Hour Division is concerned with whether any portion of a payment may be excluded from the regular rate of pay for compliance with minimum wage and overtime calculations. Only the actual or reasonably approximate amount of the expense is excludible from the regular rate of pay, under federal regulations. For this purpose, the employer need only document how it determines that the amount is excludible from the regular rate of pay. Some allowable expenses may be excludible for wage-hour purposes but subject to employment taxes, and the valuation rules may differ.

Finally, facilities provided to employees involve different valuation concerns. The value of provided facilities may be added to employee income or replace cash wages for minimum wage and overtime compensation purposes. While the fair market value should generally be used, the amount included in wages is limited by the employer’s actual cost and does not include profit to the employer.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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