How do employee expenses and employee reimbursements work with payroll?
Do you ever have one of those mornings where it feels like everything is on your plate at once? It’s barely 9 am and Angela in Accounting is reminding you for the 3rd time to sign those vendor checks, and you keep forgetting to return that call from Sally in Sales so you can’t go to the breakroom for more coffee and risk running into her. You need to review that raise request from Linda in Legal, but your laptop is dying, and you can’t find the spare charger that you always keep at the office (but also sometimes accidentally take home). Sometimes it feels like there’s not enough time (or coffee) in the day.
So, when it comes to approving those expense reports, are you taking a cursory glance before you sign and pass it on to be paid out? Or maybe you’re googling that wine that Mark from Marketing had at the client dinner to find out how a glass of wine could possibly cost so much? Either way, it’s important to understand your obligations as an employer when it comes to expense reimbursements.
What is an expense reimbursement?
We know that businesses incur costs and expenses that can reduce the business’s taxable income, but sometimes the employees are the ones incurring business expenses. That’s where expense reimbursements come in. Some common examples include business travel lodging, education & professional development expenses, mileage, and more.
Are we required to reimburse employee expenses?
The short answer is: maybe. Under the Fair Labor Standards Act (FSLA), an employee must be reimbursed for work-related expenses if those expenses would drop the employee’s earnings below minimum wage. Some states do require employers to reimburse all business expenses, so be sure to refer to your state laws to determine your specific obligations.
Are these reimbursements taxable? Accountable vs Non-Accountable Plans
Setting up an Accountable plan will help your employees avoid being taxed on their expense reimbursements. The IRS has a three-part test to determine if the plan qualifies as accountable:
- Business Connection: In this plan, the business must only reimburse expenses incurred while performing services for the company. If the expense is only partially related to the business, like a cell phone used for both person and business, the plan should only reimburse the business portion.
- Substantiation: The employee must provide documentation of the expense within a reasonable time. The IRS Publication 463 provides more in-depth information on what documentation is required and what is considered “reasonable,” but generally, employees should provide documents within 60 days. Exceptions include: expenses under $75 (that are not lodging) do not require a receipt; if you are reimbursing for meals and lodging using the IRS Per Diem amounts, then receipts are also not required.
- Refund of Excess: If the employee receives expense reimbursement in advance – often for travel or equipment purchases – they must return any excess within a reasonable time.
Reimbursements that do NOT meet the above requirements are categorized as a Non-Accountable plan which means they are considered taxable income for employees. The employer is responsible for withholding these taxes.
Key Takeaways for expense reimbursements
- To minimize the tax burden for you and your employees, consider creating an Accountable reimbursement plan that covers what is eligible and how to request it.
- To help eliminate tedious restaurant receipts, you may want to use “per diem” reimbursement for meals and lodging.
- Look into some of the many mobile apps out there to help employees track mileage and other expenses.
- It may be best to issue a company credit card to those employees with regular expenses. Just be sure the purchases are being reviewed by someone other than the purchaser!
Looking for other ways to support your employees financially? Check out our blog on the 3 Mistakes to Avoid when Setting Up a 401K Plan.