Getting Reimbursed for Employee Business Expenses
As you probably know, when the new tax bill (Tax Cuts and Jobs Act) passed last year in Congress, many personal deductions were eliminated starting in 2018 including employee business expenses.
But as long are your expenses are legitimate, there is a way to get reimbursed for them by your employer.
How does this work? There are two types of employer plans for reimbursing employee expenses – “Accountable” and “Non-Accountable”. Both plans would reimburse your expenses, but if your expenses do not meet all three IRS requirements listed below, the reimbursed amounts should be included in your gross income for the year. If you have a lot of them, it could make a substantial difference in your gross income.
To apply expenses toward an Accountable Plan, the following three conditions must be met:
1) the expenses covered under the plan must be business related; and (2) must be paid or incurred by the employee in connection with the performance of services as an employee. Allowances under the plan may include per diem allowances, allowances for meals and incidental expenses, and mileage allowances;
2) employees must be required by the plan to substantiate the covered expenses. The specific type of substantiation required under an Accountable Plan depends on the nature of the reimbursed expense, but in any case must be done in a reasonable amount of time. Certain types of expenditures are covered by other special rules. Such expenditures include: (1) traveling expenses, including meals and lodging while away from home; (2) any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity; (3) gifts; and (4) expenses with respect to any “listed property.” Other than the aforementioned expenses, substantiation is adequate if the information furnished to the employer is sufficient to identify the specific nature of each expense and to show that the expense is attributable to the employer’s business activities; and finally…
3) If employees receive advances for business expenses, the plan must require them to return any amounts in excess of their substantiated expenses within a reasonable period of time. If the arrangement contains the requisite provision for return of excess amounts, but an employee fails to return amounts received in excess of substantiated expenses within a reasonable period, the amounts paid to the employee that exceed the properly substantiated expenses are treated as paid from a Non-Accountable Plan.
If all three requirements are not met, and the employee is reimbursed for advances, allowances, or reimbursement of business expenses, the expense is then considered Non-Accountable. In this situation, the employer must report the amounts paid under the plan as wages on the employee’s W-2 Form. Moreover, such amounts are subject to withholding and to the payment of employment taxes, such as FICA, FUTA, RRTA, and RURT.
In addition, for the plan to be recognized by the IRS, it does not have to be submitted to them, but the company must demonstrate that it understands the requirements. And the best way to do that is to have it detailed in the company’s Employee Policy and Procedures Manual. If not, all employee reimbursements could be considered “Non-Accountable” and, again, the IRS would consider those amounts as wages to the employee. It is possible that non-reported wages and payroll taxes not paid could amount to some penalties and fines if your books are audited.
If you are an employer, your best bet to avoid possible fines, penalties, and future headaches would be to simply add this information to your policy and procedures manual. If your business is a corporation, you might check with your attorney or CPA about adopting an “Accountable Plan.”
For questions related to this blog, give Bressler & Company a call at 559-924-1225.