Do Your Employee Reimbursements Comply with IRS Tax Regulations?

When it comes to employee reimbursements, you must be careful that they comply with current tax law and IRS tax regulations. If not documented and posted correctly, expense reimbursements may get confused for income, which can create a mess. Furthermore, when your staff struggles for prompt and accurate reimbursements, it can create hostility and angst at the workplace; make things a lot easier with the services of a tax or accounting professional and a solid accountable plan.

Employee Reimbursements

Using an accountable plan to document and pay employee expense reimbursements means that the payment is not part of your employees’ wages which makes them exempt from taxation, like federal income or employment taxes. This has benefits for both the employee and your company, as well. If you choose not to use an accountable plan for reimbursements, the payments are subject to taxes and considered part of your staff’s taxable income.

Business Connections

Remember and remind employees as needed that each reimbursed expense under your accountable plan needs to be connected to business; the definition of a business connection is that it is a legitimate expense- allowable as a deduction- and covered or incurred by your employee while they are performing services, tasks, or work for your company. Some examples might be hotel accommodations during a business trip, meals during work-related events, or gas driving to job sites or to visit clients. These expenses should be easily documented with receipts, bills, or statements.

Employee Accountability

Depending on the accountability system that you have in place for your Employee Reimbursements, it is key that a paper-trail documents the expenses and that any excesses are accounted for and paid-back. There are some IRS guidelines that can be adapted and adopted to your workplace- or you can set your own parameters for reimbursing employees quickly and also tracking expenses accurately. It is key to keep these matters clear and concise for when tax time rolls around.

Prompt Payment

Just as it is important for your employees to substantiate expenses promptly, it is important that you do what you can to expedite reimbursements, too. A reasonable time frame for substantiation of expenses is within 60 days, and any overage should be paid within 120 days, in most cases.

Tax Tips

  • Your employees may deduct their work-related expenses, but it requires itemization.
  • The deduction for these expenditures is limited to the amount that is more than 2% of their adjusted gross income.
  • Make sure that your reimbursement arrangements meet IRS requirements for an accountable plan, which may have potential tax advantages for you.

The safest way to deal with employee reimbursements is with a reputable and reliable tax or accounting professional. Talk to the experts at BMH Accounting to learn more and escape the worry surrounding employee reimbursements.