Almost all businesses have employees who incur expenses while on the job—everything from office supplies, to travel and business dinners. But not all business owners are sure how to best handle the reimbursement of these expenses. We frequently get questions from our clients on this subject—should reimbursements be included in the employee's income? Are they tax deductible?
In order for an expense to be tax deductible to the business, and received tax-free by the employee, it must be reimbursed under an "accountable plan".
An accountable plan is a reimbursement arrangement that satisfies three basic requirements:
- Business connection
The expense must be incurred while the employee was performing their job, or in relation to the performance of their job. Typically, these expenses should be considered necessary and ordinary (i.e., your employee purchased a $5 pen, not a $500 pen), although what is covered by the company varies from business to business. Examples of the most common types of business expenses are:
- Business supplies
- Meals + entertainment
The employee must show proof of the expense (such as a receipt showing the amount, date, place, and what the expense was for) within a reasonable time period.
- Return of excess amounts
The employee must return any excess reimbursement or allowance within a reasonable time period. This means that if the employee was given $50 for dinner, and it ended up only costing $42, the employee must return the extra $7 to the business.
If your company does not have an accountable plan in place, the IRS requires you to treat any payments made to your employee for business-related expenses as wages. As wages, the expenses are subject to tax withholding.
If you have questions about employee expense reimbursements or accountable plans, please leave a comment below, or feel free to reach out to me directly. I'm happy to help!