Contractor Travel Expense Reimbursements: Taxable Or Not?

Whether reimbursed travel expenses are taxable depends on the worker's employment status. If they are an employee, their travel expenses are generally not taxable, but if they are an independent contractor, their travel expenses may be taxable.

For employees, travel expenses are generally not taxable if they are travelling for business reasons outside of their tax home or main place of work. Their tax home is usually their main place of business or work, not where they live. Travel expenses must be ordinary and necessary, and cannot be lavish, extravagant or for personal purposes.

For independent contractors, travel expenses are generally taxable, but there may be exceptions if the contractor has a separate travel reimbursement policy in place. Contractors should also be careful not to provide reimbursements for other expenses such as equipment costs, phone bills and software subscription costs, as this may lead to the contractor being reclassified as an employee.

What are travel expenses?

Travel expenses are the ordinary and necessary costs incurred when travelling away from home for business purposes. They are tax-deductible only if they were incurred to conduct business-related activities.

The Internal Revenue Service (IRS) considers employees to be travelling when their work requires them to be away from their "tax home" (the area where their main place of business is located) for a period substantially longer than an ordinary workday, and they need to get sleep or rest to meet the demands of their work while away.

Examples of deductible travel expenses include airfare, lodging, transportation services, meals and tips, and the use of communication devices.

Other types of travel expenses include:

• Personal vehicle expenses
• Taxi or rideshare expenses
• Airfare, train fare, or ferry fees
• Laundry and dry cleaning
• Shipment costs for work-related materials
• Some equipment rentals, such as computers or trailers
• Operating and maintaining a house trailer as part of the business trip

It is important to note that only ordinary and necessary travel expenses are deductible. Expenses that are deemed unreasonable, lavish, or extravagant are not deductible. Additionally, travel expenses do not include regular commuting costs.

Rates for travel expenses

As a contractor, you can claim back certain travel expenses, including mileage, public transport, subsistence, and accommodation costs. The rates for these expenses vary depending on location and mode of transportation.

For cars and goods vehicles in the UK, you can claim 45p per mile for the first 10,000 miles. After that, the rate decreases to 25p per mile. It's important to keep a record of the date of the journey, the start and end locations, the purpose of the trip, and the number of miles travelled.

If you're travelling by public transport, you can claim the cost of fares for taxis, airplanes, trains, buses, or other types of transportation. This includes travel between the airport or train station and your accommodation, as well as between your accommodation and your work location or business meetings.

When it comes to subsistence, the rates vary depending on the duration of your work assignment. For example, the standard domestic subsistence rate for 5 to 10 hours of work in Dublin, Ireland, includes vouched accommodation (VA) with a cost of up to €195.00. This rate has been increased from the previous amount of €167.

It's important to note that you can only claim reimbursement for reasonable and necessary expenses. Luxurious or extravagant expenses are not deductible. Additionally, you must provide proper documentation, such as mileage logs, receipts, and invoices, to support your claims.

Are travel reimbursements taxable?

Whether travel reimbursements are taxable depends on the nature of the employment relationship and the laws of the relevant jurisdiction. In the United States, for example, the Internal Revenue Service (IRS) treats travel reimbursements differently for employees and independent contractors.

Travel Reimbursements for Employees

The IRS considers travel expenses for employees taxable unless they meet certain criteria. For instance, travel expenses are only deductible if they are "ordinary and necessary" and incurred while the employee is travelling away from home for business, profession, or work. The IRS defines "away from home" as being substantially longer than a typical workday and requiring the employee to rest before returning to their tax home. The "tax home" is usually the entire city or general area where the employee's main place of business or work is located.

The IRS also differentiates between temporary and indefinite work assignments. Travel expenses paid in connection with an indefinite work assignment are not deductible. Any work assignment exceeding one year is considered indefinite.

Travel Reimbursements for Independent Contractors

For independent contractors, the IRS understands that there may be cases when it becomes necessary to reimburse contractors for travel expenses, such as changes in project scope that also change travel requirements. However, reimbursements to contractors are typically considered income, which can make reimbursements tricky. To avoid potential issues, employers should only reimburse contractors for travel expenses if they are not also reimbursing them for other expenses like equipment costs, phone bills, and software subscription costs.

Best Practices for Travel Reimbursements

Regardless of the employment relationship, it is important to have clear policies in place that outline what travel expenses are reimbursable and what documentation is required for reimbursement. This helps ensure compliance with tax laws and prevents potential issues down the line.

IRS rules on travel expenses

The IRS defines travel expenses as the "ordinary and necessary expenses" of travelling away from home for business, profession, or work. These expenses must not be lavish or extravagant, and must not be for personal purposes.

To be considered as "travelling away from home", your duties must require you to be away from the general area of your "tax home" for a period longer than an ordinary day's work, and you must need to sleep or rest to meet the demands of your work while away.

Your "tax home" is generally the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home. If you have more than one regular place of business, your tax home is your main place of business. This is determined by considering the length of time spent at each location, the degree of business activity in each area, and the relative significance of the financial return from each area—with the most important consideration being the length of time spent at each location.

You can deduct travel expenses paid or incurred in connection with a temporary work assignment away from home, as long as the assignment does not exceed one year. Travel expenses for conventions are also deductible if attendance benefits your trade or business, with special rules applying to conventions held outside North America.

Deductible travel expenses while away from home include, but are not limited to:

• Travel by airplane, train, bus, or car between your home and your business destination.
• Fares for taxis or other transportation between the airport/train station and your hotel, and between the hotel and your work location, customer locations, business meeting place, or temporary work location.
• Shipping of baggage and display materials between regular and temporary work locations.
• Using your car while at your business destination, including actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If renting a car, only the business-use portion of expenses is deductible.
• Lodging and non-entertainment-related meals.
• Dry cleaning and laundry.
• Business calls and communication while on your trip.
• Tips for any of the above services.
• Other similar ordinary and necessary expenses related to your business travel, such as transportation to and from business meals, public stenographer's fees, computer rental fees, and operating/maintaining a house trailer.

Instead of keeping records of meal expenses and deducting the actual cost, you can generally use a standard meal allowance, which varies depending on where you travel. The deduction for business meals is generally limited to 50% of the unreimbursed cost.

Self-employed individuals can deduct travel expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), while farmers can use Schedule F (Form 1040), Profit or Loss From Farming. Members of the National Guard or military reserve may be able to claim a deduction for unreimbursed travel expenses, as long as the travel is overnight and more than 100 miles from home, with expenses being ordinary and necessary.

Self-employed individuals or farmers with travel deductions

Self-employed individuals can deduct travel expenses on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). This includes travel by airplane, train, bus, or car between your home and your business destination, as well as fares for taxis or other types of transportation between an airport or train station and a hotel, or from a hotel to a work location.

If you are self-employed, you can also deduct the cost of using your car while at your business destination. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking fees. If you rent a car, you can only deduct the business-use portion of the expenses.

Other deductible travel expenses include lodging and non-entertainment-related meals, dry cleaning and laundry, business calls while on your business trip, and tips paid for services related to any of these expenses.

It is important to maintain good records of your travel expenses, such as receipts, canceled checks, and other documents that support your deductions.

Farmers who are self-employed can deduct travel expenses on Schedule F (Form 1040), Profit or Loss From Farming.

Frequently asked questions