An important part of running a small to midsized business, being an accountant, or being a payroll specialist is to know what expenses employees are entitled to reimbursement for from employers. According to the IRS, expenses that the employer is entitled to reimburse the employee for cost are work-related supplies, travel done away from work (tax home), business use of a car, meals that have a clear business purpose and gifts to clients, up to $25. Substantiate these deductions by always having a written record and an accountable plan in place.
Expense reimbursement allows employers a way to properly pay back an employee after they spend their own money for work-related expenses. IRS Publication 463 defines deductible expenses for employees: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Additionally, any expenses reimbursed in excess of deductions must be returned to the employer within a reasonable amount of time. If the employer decides to reimburse an employee for an expense, say above the standard mileage rate for driving, then the excess amount is considered taxable income.
Work related tools and supplies are reimbursable costs that an employee is entitled to reimbursement – exceptions do apply. IRS Publication 463 defines the special rules and restrictions.
Travel & Transportation
The cost of travel can be deducted, provided it meets the criteria in Publication 463. Travel, including international, are reimbursable – provided no more than 25% of the time is spent for personal use.
For transportation, there is a standard deduction for miles driven, that as of 2016 is 54 cents per mile. This does not include the commute to work/tax home but does include any business-related driving done from tax home. Just make sure that the business connection is documented and well substantiated
Employees whose tax home is the same as their family home are entitled to special, miscellaneous deductions as defined in IRS Publication 529
and Publication 587
. These deductions are itemized and are unlikely to be met by the average office worker.
Meal costs – and entertainment costs if business related – incurred within the employee’s tax home or on behalf of the company are reimbursable. Employees who pay are entitled to 100% reimbursement of meal costs while employers can deduct only 50% of the cost of a meal.
Compliant process for reimbursing employees
Your employees need to adequately document their deductible expense and submit it to their employer within a reasonable time period. For a meal, this would include a receipt with a brief description on the back describing business purpose and those in attendance. Reimbursed expenses become taxable income on W-2 for the employee is the employer does not have an accountable plan.
Create an accountable expense plan for your business to facilitate the reimbursement process and ameliorate any confusion and stress for the employer. Making a process for business expenses is a necessary part of running a business. If the employer creates a written accountable plan, and the employees submit substantial documentation of their expenses under that plan, then the reimbursements are not taxable income.
Proper documentation of work-related expenses is vital to reimbursement. Not having proper documentation is a very big deal if ever you are audited by the IRS.
The employee must always document in written record:
- people present
- the business purpose of the meeting
Only after proper documentation is submitted to the employer shall they reimburse the employee. Receipts or photos of both sides of receipts are always required. No other forms are needed for reimbursements.
Save time and hassle and promote a healthy business by ensuring that your company has an accountable plan in place that is IRS compliant.