Do you reimburse your employees' out-of-pocket business expenses? If so, set up an accountable plan.
September 18, 2019
Do you reimburse your employees’ out-of-pocket business expenses?
If so, be sure to set up an accountable plan. When you reimburse an employee under a non-accountable plan, the IRS requires you treat these funds as wages and withhold payroll taxes. Non-accountable plans typically consist of regular monthly allowances.
An accountable employee expense reimbursement plan allows you to cover employees’ out-of-pocket business expenses via tax-free reimbursements or advances. To be “accountable” the plan must meet the following criteria:
1. Expenses are legitimate business expenses.
2. Expenses are substantiated by receipts.
3. Receipts are submitted in a reasonable time period, 60 days after expenses are paid.
4. Unsubstantiated or excess funds are returned to you, the employer, within a reasonable time period, 120 days after expenses are paid.
Here are some tips:
- In lieu of the 60-day / 120-day rule, you may issue quarterly expense statements to employees where receipts and excess amounts are due within 120 days of the statement date.
- For meal expenses, employees are required to record the date, location, attendees, total bill and purpose of meeting.
Do you own a company vehicle?
Under an accountable plan, employees using employer-provided vehicles must submit trip logs to substantiate business expenses. Exceptions include:
1. Delivery, flat bed or dump trucks.
2. Specially modified vehicles. (i.e. Vans modified for transport that have been specially painted with the company name, equipped with only a front bench seat and permanent shelving in the cargo area.)
3. Any vehicle where written company policy restricts employees from driving for personal use other than de minimis.
Here are some tips:
- Trip logs note the destination, purpose and date of travel, persons visited, and number of miles driven.
- Employees who drive their own vehicles for business-use must also submit trip logs, if they are reimbursed using the cents per mile method.
- Employer-provided vehicles driven for personal use is considered a fringe benefit whose value must be reported on employee’s W-2.