Reimbursements are not so cut and dry, however, and there are many questions that must be considered when reimbursing employees:
What kind of expenses are reimbursable?How much is reimbursable?What kind of documentation is needed?Are the reimbursements subject to Tax Withholding?
Accountable Plan
Clients often ask whether expenses paid for by their employees can be reimbursed tax free. In order for reimbursements to be tax exempt, they must be paid under what's known as an "accountable plan," and the reimbursements must meet certain criteria.
In short, an "accountable plan" is one where employees must account for their expenses with documentation and reasoning. The following three elements are checked to determine whether or not employee reimbursements and advances are eligible to be made without FITW:
Business connectionAdequate substantiationExcess funds returned within reasonable time
For reimbursements and advances to be tax free, employees must prove their expense has a prudent business connection. The expense must be paid for or incurred by an employee while performing their duties as an employee. If advance is paid, it must be done so at a time when it is anticipated that an expense will take place.
Employees must also provide the employer with adequate substantiation, which typically comes in the form of a receipt, however, the substantiation rule is met as long as the employee provides the amount of the transaction, as well as its time and place. Additionally, the description of the business connection must be part of the substantiation.
We recommends companies put an expense report policy in place, requiring employees to submit expense reports detailing the information regarding the expense reimbursements, complete with receipts attached, prior to issuing reimbursements. It is always a good idea to have policies in place to standardize these kinds of processes within a company. These types of proactive procedures allow for more managerial control, and fewer compliance issues with the IRS and other tax agencies.
The final element for an "accountable plan" only applies to advances. This rule dictates that any advanced amount in excess of the substantiated expense must be returned to the employer within a reasonable amount of time. A reasonable time can be determined as either being a fixed amount of time, usually within 30 days from when the expense is incurred, or on a periodic basis where the employer provides the employee with periodic statements showing the expenses that must be substantiated. These statements are usually quarterly, and employees should not take more than 120 days to substantiate outstanding expense advances.
PayMatic Payroll Service is a full service payroll bureau based in Monsey, NY providing payroll, HR and time and attendance solutions custom fit to your business needs. Additionally, PayMatic Payroll's team of certified HR professionals can answer questions in regards to wage and hour law, legal compliance and personnel issues in all 50 states.
PayMatic Payroll Service specializes in payroll for small and mid size businesses in all 50 states and has been providing complete payroll peace of mind since 2007.
Please visit us at http://www.paymaticinc.com/ for more information about PayMatic Payroll.
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