Expense reimbursements to employees and owners are one of the most consistently overlooked and incorrectly applied parts of the tax code. With the passage of the Tax Cuts and Jobs Act (TCJA) several years ago, there were new reasons why reviewing your policy and plan is critical.
Understanding Your Options
The IRS allows two different options when it comes to employee reimbursement. You can choose an Accountable Plan, which basically you as the employer are going to keep the records and meet the requirements.
The second option is a Non Accountable Plan, which means you report the reimbursements as income to the employee, and the employee is responsible for the tax treatment. The most common example of a Non Accountable Plan is a car allowance.
Because the TCJA removed the deductibility of unreimbursed employee expenses, there is a strong incentive to NOT have a Non Accountable Plan. Prior to the TCJA, a Non Accountable plan wasn’t usually a good idea because you were paying extra payroll taxes, but now you’re just throwing money away.
Confusion arises when owners use per diem amounts to reimburse employees for certain travel expenses. The IRS allows employers to use a per diem rate that varies based upon their geographic location for lodging, meals, and incidentals. Per diems are handy because they reduce the paperwork burden for employers.
For Business Owner
Because the IRS limits the use of per diem for business owners, and requires complete documentation, we do not recommend that you use them for yourself. Simply setup an Accountable Plan and reimburse yourself for actual expenses, or better yet, have the company pay the expense directly. You will still need to keep adequate records, but will eliminate a step.
Generally per diem payments are easier to manage, and causeless hassle for employees. Make sure that you have set up an Accountable Plan so that the expenses are fully deductible to the business and are not income to the employee.
Accountable Plan Requirements
1. Expense reimbursements must be clearly shown as such. So you can include in your regular payroll cycle, but it needs to be separated. Alternatively, you can pay with a separate check.
2. Business purpose, time and place of travel, and description of business relationship need to be included on an expense report or other documentation.
3. If the employee’s expenses are less than an advance (like a car allowance), then they have to pay it back to the employer. Otherwise it is treated as income on their W-2. This doesn’t apply to per diem amounts.
4. Documentation must be made within 60 days of when incurred, and advances cannot be made more than 30 days before the expense is incurred. Unsubstantiated amounts must be returned within 120 days.
At Core Group, we love sharing information about small business practices you need to know about, but what we love more is helping your business thrive directly. If you are curious about how Core Group could help your business, contact us today.