Stipends and reimbursements are two common ways to pay employees back for business-related expenses and offer lifestyle benefits.
They're two different (though not mutually exclusive) concepts, though. In this guide, we'll show you which type of compensation to use and when.
What are stipends and reimbursements, exactly?
First, let's define stipends and reimbursements.
A stipend is a fixed sum of money employers offer to employees for expenses related to redcurring living, travel, and business costs.
Employers typically disburse stipends through payroll ahead of time on a monthly, quarterly, or annual basis (monthly stipends are the most common). The amount is always the same, no matter the cost of services or materials.
A reimbursement is a repayment for specific out-of-pocket expenses an employee incurs on behalf of the organization.
It's typically a one-time payment, and it happens after an employee has already paid for a product or service. With reimbursements, employers agree ahead of time to cover a portion (or the total amount) of an employee's purchases — e.g., a plane ticket, home office equipment, or school tuition.
There are two primary ways employers use stipends and reimbursements:
- To offset business expenses — When employees have to spend their own money to perform their job function or conduct business on behalf of the company, the company will reimburse them and deduct the amount on an expense report. 11 states, D.C., and Seattle, WA legally require companies to reimburse for certain expenses. Regardless of legality, most organizations do it anyway because it's the fair thing to do.
- As a fringe benefit — Employers often give stipends or reimburse non-business-related costs as part of their total comp plan. They might also use them as additional income for employees who go above and beyond, take on extra projects, or consistently exceed expectations. In both instances, stipends are intended to improve employee engagement and offset the costs of everyday life.
Examples of employee stipends
You can offer a monthly stipend for practically anything imaginable. Employers generally select the stipends according to the nature of their business activities and the interests of their employees.
A few of our favorite types of stipends include:
- Cell phone stipends
- Charitable giving stipends
- Equipment stipends
- Family stipends
- Health and wellness stipends
- Learning and development stipends
- Meal allowances
- Remote work stipends
- Student loan repayment assistance
- Travel stipends
For example, Webflow uses Compt to offer its employees $200 per month health and wellness stipends, which they can use for things like yoga classes, gym memberships, and nutrition subscriptions.
***Per the Internal Revenue Service (IRS), some fringe benefits are subject to payroll taxes, while others aren't. To learn more about how to account for stipends on expense reports, read our guide on which fringe benefits are taxable and non-taxable.
Examples of reimbursements
Many employers use reimbursements to cover specific employee expenses. Most of the time, they only reimburse up to a specific amount, and employees must provide proof of purchase or other documentation before they can be reimbursed.
Examples of common employee reimbursements include:
- Business meals and entertainment
- Business tools, equipment, and software
- Business travel expenses
- Gym reimbursement
- Home office setup and equipment
- Mileage reimbursement
- Professional development costs (e.g., certifications, courses, conferences, and trade shows)
- Tuition reimbursement
- Uniforms and safety equipment
As an employer, setting up an expense reimbursement policy is in your best interest. This way, employees will know exactly what they need to do in order to be reimbursed for their expenses. It also protects your business from potential fraudulent expense reports and helps you comply with federal, state, and local tax codes.
Stipends vs. reimbursements... What's the difference?
While stipends and reimbursements both provide financial support to employees, the two concepts aren't exactly the same.
Let's look at some key differences between the stipend and reimbursement model.
When we refer to stipends, we're talking about a fixed amount of money given to an employee to help cover specific costs. It's often given without the recipient needing to account for how they use the funds. It doesn't necessarily have anything to do with expenses incurred, and there may not be rules for excess funds.
Essentially, a stipend is an award given in its entirety.
With reimbursements, the amount reimbursed is contingent upon the actual expenses documented through receipts or invoices. Thus, the reimbursement amount could either equate to the sum total of all validated receipts or the maximum allowable award amount stipulated by the organization, whichever is less.
Stipends are usually processed promptly, meaning that individuals receive the full payment upfront. Recipients have the necessary funds to cover anticipated costs without having to shell out their own money.
In that sense, stipends grant individuals a level of financial freedom and planning autonomy from the outset, allowing them to budget and allocate funds in a way best suited to their needs.
Reimbursement timelines are generally more protracted.
- The employee spends their own money on the product, service, or operating expense.
- They submit a request for reimbursement, along with the appropriate receipts and other documentation.
- The company reviews the request and verifies it. This review process can take days or even weeks in some cases.
- They account for the expenses in their report.
- They issue a payment to cover the costs.
IRS Publication 463 states that incurred must be documented and within a 60-day window, then paid within 30 days thereafter. This sometimes leads to employers missing out on valid reimbursements for business purposes due to lost receipts or failure to submit on-time.
For the most part, stipend recipients don't need to provide any kind of proof or documentation in order to receive their payments. Instead, those that aren't considered taxable income are regulated by specific rules and statutes.
- Commuter benefits can be withheld from income tax up to $300 per month.
- Student loan repayment assistance and tuition reimbursement are non-taxable up to $5,250 per employee per year.
- Per diem travel expenses are limited by your local per diem rate.
- Vehicle usage is expensive at the standard mileage rate of 65.5¢ per mile.
Reimbursement typically requires receipts and/or invoices for validation. These receipts, at the very least, should include the vendor name, purchase/sale date, item/service purchased, and cost. Some expense types require additional information as well.
When it comes to taxes, reimbursements and stipends are quite different from one another.
- Tax forms — Depending on the recipient’s residency status in the US, you'll have to report stipends using one of two tax forms. US citizens or resident aliens are required to complete a W-9 or W-2 form including these expenses, while non-resident aliens must fill out a W-8BEN form. Reimbursements don't require tax forms.
- Tax reporting — Stipends are treated as taxable income unless they meet specific exceptions under IRS Publication 15-B. Reimbursements under an accountable plan aren't subject to income, Social Security, or Medicare taxes. Those under non-accountable plans are.
Stipends and reimbursements aren't mutually exclusive concepts (with Compt, at least).
In certain situations, employers may choose to offer a stipend and reimbursement combination. We refer to this as a stipend reimbursement.
1. The reimbursement model means employers don't have to front the funds.
Employers benefit significantly from a reimbursement model for employee benefits as it alleviates the financial burden of upfront costs. By allowing employees to pay for their benefits initially and then reimbursing them, companies can efficiently manage cash flow without tying up large sums of money.
2. Reimbursements are a "use it or lose it" mechanism—you're not paying for unused benefits.
Employers only need to reimburse for the amount the employee spends, and not a cent over (versus offering a stipend that's set at an arbitrarily high amount).
Let's say your company offers a fitness stipend of $150 per employee. When employees don't use the full $150, you're essentially leaving money on the table.
For these employee benefits, it still makes more sense to pay out what employees spend after the fact.
3. Employers can control spending without sacrificing employee autonomy and satisfaction.
The 'stipend' aspect of the stipend reimbursement model means that employees can choose the vendors they want.
The direct benefits of this are:
- higher utilization rates (employers using Compt typically see 90% employee engagement)
- happier employees who receive personalized benefits
- inclusivity, especially for remote teams whose employees don't all have access to the same set of vendors
This is particularly advantageous when you're offering health benefits, professional development stipends, or health and wellness perks that would be impossible to standardize for every employee's needs.
Basically, Compt gives employers the best of both worlds. Plus, we make it 100x easier to manage expenses and tax compliance. And we're the only platform that does this. Don't believe us? See for yourself.