If employees buy their own tools to do the job, the reimbursement should follow a plan.
A workplace tools account reimburses employees for tools they own and need for work: a mechanic’s set, a stylist’s kit, a carpenter’s saws. Reimbursed under the right rules, it stays out of wages. Reimbursed informally, it can be taxable pay, and it can quietly cut a low-wage employee’s pay below the legal minimum.
An accountable plan keeps it out of wages.
The tax code lets an employer reimburse business expenses without adding them to pay, but only if the arrangement meets three tests.
Business Connection
The expense has to be one the employee incurs in doing the job, such as tools the employer requires or that the work demands. Personal items do not qualify just because they are used at work.
Substantiation
The employee has to show the amount, date and purpose of each expense within a reasonable time, normally with a receipt. Round-sum allowances without proof are treated as wages.
Returning Any Excess
If the employee receives an advance larger than the substantiated expense, the extra has to be returned within a reasonable time. Anything kept becomes taxable pay.
Why It Matters More Than Before
Since 2018, employees generally cannot deduct unreimbursed job expenses on their own returns. An employee who pays for tools out of pocket therefore gets no tax relief. A reimbursement under an accountable plan is the only tax-efficient way to cover it.
The Minimum Wage Trap
Under federal wage rules, the cost of tools an employee must buy for the job cannot reduce pay below the minimum wage or cut into required overtime. For lower-wage workers, a tools reimbursement can be a legal requirement, not a perk.
Tools Stay With the Employee
Unlike employer-owned equipment, these are the employee’s own, and they leave with them. The policy should say what is covered, up to what amount per year and whether a replacement is reimbursed when a tool wears out.
What the policy should say.
Which Tools
A list or a rule, such as hand tools required for the trade, so employees know what qualifies before they buy.
How Much
A yearly limit per employee, and a rule for expensive items.
How to Claim
Receipts, a form and a deadline, with payment on a set schedule.
The questions employers ask about tools accounts.
Five questions that come before the policy is written.
Is a tool reimbursement taxable?
Not if it is paid under an accountable plan, with a business connection, proof of the expense and return of any excess. Otherwise it is wages.
Can we pay a flat tool allowance?
A flat allowance without substantiation is treated as wages. A plan can pay a flat amount if employees are required to show the expense and return any difference.
Do employees have to be reimbursed?
Not always, but for low-wage workers the cost of required tools cannot bring pay below minimum wage, so reimbursement can be necessary.
What about tools the employer buys?
Those belong to the employer. This account is for tools the employee owns.
How does this differ from a home office account?
A home office account covers a remote worker’s workspace. A tools account covers equipment of a trade. Both can sit under the same accountable plan.
Ready? Upload your renewal, or talk it through with someone first. No cost, no obligation.
General information about workplace tools accounts, not legal or tax advice. Plan-specific questions belong with your tax adviser or counsel, and we will bring them in.
Related guides.
Professional Expense Accounts
Reimbursing licensing, training, travel and home office costs.
Lifestyle and Specialty Accounts
The accounts that cover what insurance does not.
Compensation Strategy and Total Rewards
How pay and benefits fit together.
Where the Rules Come From.
The laws and rules named on this page link to the statute or regulation they come from. This is general information, not legal or tax advice, and rules change, so check the current text.
Accountable Plan Rules (26 C.F.R. 1.62-2)
The test for reimbursing business expenses outside of wages.
Free and Clear Wage Rule (29 C.F.R. 531.35)
Why required tool costs cannot cut pay below minimum wage.
Send us your renewal.
We’ll tell you whether it looks competitive, where we see opportunity, and the five questions we’d put to your carrier. No cost, and no obligation to move anything.
The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents, two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
An independent employee benefits consulting firm. We look at the entire benefits program — cost, plan performance, risk and administration.
Switch to CFH. Unhappy with your broker? Your employees won’t notice. You will. →