Employees can and do have expenses. Sometimes they are via emergencies when you aren’t around as well as those who have expense accounts for traveling, meetings, and food. Still, some employers provide continuing education dollars but ask the employee to pay first and then the employee expense reimbursement through payroll is the best practice.
What does the IRS say about this type of employee reimbursement? After all, if you are offering up reimbursement for things that aren’t what the IRS calls an “approved accountable plan," if you get caught or audited, you could incur fines.
The IRS offers up an article called New Guidance on Accountable Plans (a must-read), and you can also find information on expense reimbursement in the IRS Employer’s Tax Guide-Publication 15, better known as the Circular E.
Essentially, you need to determine if expenses that are reimbursable are indeed expenses or wages. If an audit reveals they are wages and you failed to deducted the appropriate payroll taxes, expect fines and penalties—big ones.
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?
Where It Can Get Tricky
To be safe, modest expenses can be reimbursed through payroll such as an item an employee must purchase with his own dollars and which is considered an emergency—as long as it relates to the business. This could include gas, stamps, office supplies, etc.
Rather than choosing employee expense reimbursement through payroll as a best practice on other items such as continuing education, meals, travel time and other employee expenses, most business owners can stay on the safe side if they have employees complete expense reports and pay from those reports. The employee can be reimbursed through a regular business operating account and the expenses can be charged accordingly to the correct expense account.
A free employee expense report template can be found in our Media Gallery and can be modified to fit your business needs.
Stay on the safe side of determining if you are legally following IRS rules on employee expense reimbursements and stick with the expense report and reimbursement through your business operating account.
Internal Revenue Service: https://www.irs.gov
IRS – Employee Reimbursement Plans – https://www.irs.gov/govt/fslg/article/0,,id=164471,00.html
IRS Publication 15 (Circular E) – https://www.irs.gov/pub/irs-pdf/p15.pdf
IRS Publication 1542 – https://www.irs.gov/pub/irs-pdf/p1542.pdf