What expense category is Remote Work Stipends?

As remote work becomes a business standard, many companies offer stipends or allowances to help employees cover the costs of their home office, including internet, supplies, and furniture. While these stipends are a deductible business expense for the employer, their tax treatment is one of the most frequently misunderstood areas of payroll and expense management.

The way a stipend is categorized and taxed depends entirely on the structure of the reimbursement plan. The IRS draws a critical distinction between accountable plans and nonaccountable plans. This guide will clarify how to classify remote work stipends to ensure your business and your employees remain compliant.

Remote Work Stipends Category

There is no single expense category for a remote work stipend. Its classification depends entirely on your reimbursement arrangement.

1. As Wages (Nonaccountable Plan): If you provide a fixed allowance (e.g., $100 per month) and do not require employees to prove how they spent it, the stipend is considered part of their compensation. The entire amount is a deductible wage expense for the employer.
2. As Specific Expense Reimbursements (Accountable Plan): If you reimburse employees for their actual, substantiated remote work expenses, you deduct the costs in their proper categories (e.g., Utilities for internet, Supplies for stationery, or Depreciation for office furniture).

Important Considerations While Classifying Remote Work Stipends

The most critical factor is whether your stipend or reimbursement arrangement qualifies as an accountable plan under IRS rules.

The Accountable Plan Test

According to IRS Publication 463 and the rules on reimbursements, an accountable plan must meet all three of the following tests:

1. Business Connection: The expenses must have a clear business connection.
2. Substantiation: The employee must provide the employer with adequate documentation of these expenses (e.g., receipts or invoices) within a reasonable timeframe.
3. Return of Excess: The employee must return any reimbursement or allowance that exceeds substantiated expenses.

The Nonaccountable Plan Default

If an arrangement fails any one of these three tests, it is a nonaccountable plan. A typical fixed remote work stipend, where no receipts are required, fails the substantiation and return-of-excess tests. Therefore, it is a nonaccountable plan by default, and the payments must be treated as wages.

Tax Impact on the Employee

The plan type directly affects your employees' taxes:

• Accountable Plan: Reimbursements are not included in the employee's income and are tax-free to them.
• Nonaccountable Plan: The stipend is considered taxable income. It must be included in their gross wages and is subject to federal income tax withholding, social security, and Medicare taxes.

Tax Implications of Remote Work Stipends

The tax reporting for the employer depends entirely on the plan structure.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040):

• Nonaccountable Plan Stipends: The total amount is included on Line 26, Wages.
• Accountable Plan Reimbursements: The substantiated costs are deducted on their respective lines, such as Line 25, Utilities, or Line 22, Supplies.

What Records to Keep

You must maintain records to justify your classification.

• For an Accountable Plan: Keep the written policy, all submitted receipts and expense reports, and proof of reimbursement.
• For a Nonaccountable Plan: Keep payroll records showing the stipend was included in wages and that all applicable taxes were withheld and paid.

How Fyle Can Automate Expense Tracking for Remote Work Stipends

Fyle helps you manage either an accountable reimbursement plan or track stipend payments, ensuring all costs are documented and compliant.

• Enforce Your Stipend Policy: Use Fyle’s policy engine to set rules for what can be reimbursed under an accountable remote work plan.
• Capture All Employee Receipts: Employees can easily submit receipts for home internet bills or office supplies via the Fyle mobile app or email.
• Streamline Reimbursements: Fyle automates the reimbursement process for all approved expenses under an accountable plan.
• Automate Your Accounting: Sync costs to the correct GL accounts—whether it's Utilities and Supplies for an accountable plan or payroll data for a nonaccountable stipend.