Excerpt From Our Online Payroll Compliance Course
Employee Business Expense Reimbursements
Employers must have a reimbursement or allowance arrangement in place to reimburse employees for eligible expenses incurred on behalf of the company.
A reimbursement or allowance arrangement is a system by which an employer substantiates and pays the advances, reimbursements, and charges for its employees' business expenses.
How a reimbursement or allowance amount is reported depends on whether the employer has an accountable or a non-accountable plan.
Accountable Plan
To be an accountable plan, the reimbursement or allowance arrangement must require employees to meet all three of the following rules:
- They must have paid or incurred deductible expenses while performing services as employees of the company
- They must adequately account for these expenses within a reasonable period of time, and
- They must return any amounts in excess of expenses within a reasonable period of time
Amounts paid under an accountable plan are not wages and are not subject to FITW, social security, Medicare, and FUTA taxes.
If the expenses covered by this arrangement are not substantiated, or amounts in excess of expenses are not returned within a reasonable period of time, the amount is treated as paid under a non-accountable plan and is subject to FIT social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period.
A reasonable period of time depends on the facts and circumstances. Generally, it is considered reasonable if employees receive the advance within 30 days of the time they incur the expense, adequately account for the expenses within 60 days after the expenses were paid or incurred, and they return any amounts in excess of expenses within 120 days after the expense was paid or incurred.
Also, it is considered reasonable if the employer gives employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days.
Non-accountable Plan
Payments to employees for travel and other necessary business expenses under a non-accountable plan are wages and are treated as supplemental wages and subject to FIT, social security, Medicare, and FUTA taxes.
Payments are treated as paid under a non-accountable plan if the:
- Employee is not required or does not substantiate timely expenses with receipts or other documentation, or
- Employer advances an amount to an employee for business expenses and the employee is not required to or does not return timely any amount he or she does not use for business expenses
Example: Late Thursday night Angie is asked to go on a trip for the company on Friday morning to a city 40 miles away. She takes a company car and uses the company gas card for her travel expenses to and from the client. Although the trip could be done within the same day, Angie has family in the city right near where the client is, so she wants to combine the business trip with a personal trip and is going to stay overnight with family. The client will need additional items such as copies of a report from Angie and her boss gives her $75 from the company’s petty cash to cover any expenses that may be incurred. To show his appreciation for her agreeing to go on the trip at the last minute, he tells her that if she doesn’t use the cash for the trip, she should spend it on a nice dinner for her and her sister. The client receives the report on time and has no additional needs so Angie does not spend any of the $75. Angie buys a nice dinner for her and her sister. On Monday, she reports to her boss that the client is very happy and that all went well. She thanks him for the nice dinner. Since the money given to Angie was not used for company expenses and she did not return the unused portion, the money was paid under a non-accountable plan and is fully taxable as wages to Angie.
If a single payment includes both wages and an expense reimbursement, the amount of the reimbursement must be specified.
These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee.
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