Authored by: Travis Landry, CPA. Travis is a Staff Accountant in the Salt Lake City office of Cook Martin Poulson, PC. Travis specializes in Tax reporting for small to medium sized businesses and their owners. He also is an expert in QuickBooks and provides some Contract Controller responsibilities.
Every year, we get clients who ask us, “How should I reimburse myself or employees for the expenses that they incur for the company?” As you can imagine, the IRS has a very detailed list of rules that breakdown the 2 different classifications of reimbursement plans. They are known as an Accountable Plan and a Non-Accountable Plan.
An Accountable Plan is the most preferred plan because all of the reimbursements count towards an expense for the company. A Non-Accountable Plan, however, makes it so the money reimbursed to the owner or employee shows up as wages on the persons W-2 making the reimbursements subject to payroll taxes. It is our job as your accountants to make sure your company follows the rules to be considered an Accountable Plan so that you pay less in tax. The rules to ensure you have an Accountable Reimbursement Plan are listed below.
The reimbursement/allowance must:
1) Have a business connection.
a. The expense must be incurred/paid by the employee in connection with the performance of services as an employee of the employer.
b. These expenses should be normal and ordinary with respect to the business and it’s industry.
2) Be substantiated.
a. Information must be submitted to the company sufficient to enable the company to identify the specific nature of each expense and to conclude that the expense is attributable to the payor’s business activities.
i. For a mileage reimbursement, this means the employee should submit their business mileage to the employer.
ii. For specific materials or supplies, this means the employee should submit their receipt to the employer.
3) Not exceed the actual amount of expenses substantiated.
a. An employee must return to the company, within a reasonable period of time (usually not longer than 3 months), any amount paid under the arrangement in excess of the expenses substantiated.
i. This means that if a company has a per diem travel allowance of $50/day and the employee only spent $25/day, the employee would have to return the excess $25/day that they didn’t spend.
1. If they didn’t return the excess within a reasonable period of time, that amount should be included on their W-2 and subject to payroll taxes.
As long as you can prove that you do these 3 things, you can rest assure that the IRS wont expect you to classify your reimbursements as wages.
One thing to note, if your mileage reimbursement rate is larger than the IRS’s standard mileage rate ( $.555/mile) the additional amount above the $.555/mile would need to be included on the employee’s W-2.
For example: John reimburses his employees $.75/mile for the mileage they drive in their personal vehicles while driving around to solicit the company. Because John pays $.20 more per mile than the standard IRS rate, John should classify $.20/mile as payroll expense for each employee he reimburses at $.75/mile.