Reimbursing by the Rules
In Revenue Ruling 2006-56 by the IRS, which reviewed employee expense reimbursement, it was found that in order for it to be an accountable plan or allowed, it must “be a business connection and the expense must be reasonable; there must be reasonable accounting for the expenses; and, all excess reimbursements must be repaid in a reasonable time."
This same ruling also stated that accountable or accepted plan reimbursements for per diem items such as travel time, mileage, and others must comply with the allowable per diem amounts. A list of acceptable per diem rates can be found on the IRS website in Publication 1542; per diem rates do vary from year to year, so it's a good idea to check with Publication 1542 yearly.
If an employer does reimburse an employee more than the allowable per diem rates, the overage amounts are considered wages and are, therefore, subject to federal, social security, and Medicare taxes.
So what does this mean to the business owner?
Beyond reviewing the IRS Publications listed above (15 and 1542), employers should consider the following:
- Is the expense a business expense?
- If it is a per diem expense, what is the allowable per-day expense; and if the employee has submitted overages, what portion is considered wages?
- Does the company keep accurate accounting records and receipts of reimburse expenses?
- Are employee expenses reimbursed in the allowable time, or under 60 days from the date of the expense?