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  • Writer's pictureJeremy Springer

Expense Reimbursements for Employees

Every business owner wants their employees to be repaid if something was purchase for the business. On the flip side, employees do not want to cover travel costs for work related events or trainings. Enter the expense reimbursement. Hold on! It isn't always as easy as providing a receipt to receive non-taxable funds from the company. Read on to know the ins and outs of reimbursing an employee's expense.

stack of receipts

Employer Reimbursements

An employer may reimburse you for travel and meal expenses incurred while performing services for the employer. The tax treatment of the reimbursement, including per diem allowances, depends on whether the employer has an “accountable plan” or a “nonaccountable plan.”


If expenses are reimbursed under an accountable plan, the employer deducts the amount allowable as travel and meal expenses, and you exclude the reimbursement from income.


If the expenses are reimbursed under a nonaccountable plan, the employer reports the reimbursement as taxable wages to the employee on Form W-2 and takes a wage expense deduction.


Note: Only Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses may file Form 2106, Employee Business Expenses, to claim any unreimbursed business expenses due to the suspension of miscellaneous itemized deductions subject to the 2% AGI

limit.


Accountable Plan

To qualify as an accountable plan, you must:

  1. Have paid or incurred deductible expenses while performing services as an employee,

  2. Adequately account to the employer for these expenses within a reasonable period of time, and

  3. Return any excess reimbursement or allowance within a reasonable period of time.


An arrangement under which the employer advances money to you is treated as meeting (3), previous column, only if the following requirements are also met.

  • The advance is reasonably calculated not to exceed the amount of anticipated expenses.

  • The employer makes the advance within a reasonable period of time.


Excess reimbursement. Any amount advanced to the you that exceeds the amount adequately accounted for by you must be returned to the employer within a reasonable period of time.


If a reimbursement arrangement provides for meal expenses in excess of the federal per diem rate, there must be a mechanism in place to track the actual expenses for purposes of returning the excess to the employer. If such a mechanism is not in place, the entire amount of reimbursement is included in your taxable wages, not just the amount in excess of the federal per diem.


Reasonable period of time. Facts and circumstances determine what is reasonable in a given situation. Actions that take place within the following list will be treated as taking place within a reasonable period of time.

  • The employer reimburses an expense within 30 days of the time the employee incurred the expense.

  • The employee adequately accounts for the expense within 60 days after the expense was paid or incurred.

  • The employee returns any excess reimbursement within 120 days after the expense was paid or incurred.

  • The employer gives the employee a periodic statement, at least quarterly, that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the date of the statement.


Reimbursement not requested. When an employee has a right to reimbursement for expenses related to his or her status as an employee but fails to claim reimbursement, the expenses are not deductible since they are not considered necessary expenses.


Court Case: The taxpayer’s job involved extensive traveling in a two-state area. His employer had a policy under which employees were eligible for reimbursement of all types of nonvehicle business expenses. The taxpayer did not submit any expenses for reimbursement from his employer. Instead, he deducted the expenses as unreimbursed business expenses on his tax return. The court noted that it was not necessary for the taxpayer to remain unreimbursed for the expenses. To the extent the expenses could have been reimbursed, the court disallowed the taxpayers claimed deductions. (Stidham, T.C. Summary 2012-61)


Nonaccountable Plan

Any form of reimbursement that does not meet the accountable plan rules is a nonaccountable plan. All amounts paid, or treated as paid under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, Social Security, Medicare, and federal unemployment taxes.


Paying Expenses of an Employer

If the expense paid by you is for your employer and not yours, the expense might not be deductible. This could be the case where you are both the shareholder and employee of your corporation. You may pay a corporate expense, such as office rent, out of personal funds when the corporate checkbook is low on funds. Since the expense is a liability of the corporation and not yours, the expense is not deductible by you because it is not an ordinary and necessary business expense.


Reporting Reimbursements

If the reimbursement, or other expense allowance is under:

Then the employer reports on

Form W-2:

And the employee reports on

Form 2106:*

An accountable plan with:



Actual expense reimbursement with adequate accounting made and excess returned.

No amount.

No amount.

Actual expense reimbursement with adequate accounting and return of excess both required but excess not returned.

The excess amount as wages in box 1, box 3, and box 5.

No amount.

Per diem or mileage allowance up to the federal rate with adequate accounting made and excess returned.

No amount.

All expenses and reimbursements only if excess expenses are claimed. Otherwise, form is not filed.

Per diem or mileage allowance up to the federal rate with adequate accounting and return of excess both required but excess not returned.

The excess amount as wages in box 1, box 3, and box 5. The amount up to the federal rate

is reported in box 12 (code L) but not in box 1.

No amount.

Per diem or mileage allowance exceeds the federal rate with adequate accounting made up to the federal rate only and excess not returned.

The excess amount as wages in box 1, box 3, and box 5. The amount up to the federal rate is reported in box 12 (code L) but not in box 1.

The amount that can be substantiated as a business deduction reported in box 12, if expenses in excess of the federal rate are claimed.

A nonaccountable plan with:



Either adequate accounting or return of excess, or both, not required by plan.

The entire amount as wages in box 1, box 3, and box 5.

The amount that can be substantiated as a business deduction.

No reimbursement plan:




The entire amount as wages in box 1, box 3, and box 5.

The amount that can be substantiated as a business deduction.

* Only Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses may file Form 2106.


 

Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.


Certain content on this page is copyright © 2024 Tax Materials, Inc. All Rights Reserved for applicable content. Used with permission.

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