July 28, 2021-
Apparently, there’s some confusion over reimbursement of employee expenses as major companies have been forced to pay millions in unreimbursed expenses and fines.
After incurring the scrutiny of the Internal Revenue Service (IRS), six nationwide companies had to pay $22 million in 2021, according to published reports.
There are legalities and tax regulations concerning the reimbursement of employee expenses.
In addition, it’s important for business success to keep your employees happy.
So, you must have an accounting plan for necessary and ordinary business expenses in order to reimburse employees so it’s tax-free. If you don’t, you risk having the reimbursements taxed as wages.
Defining employee expenses
Employee expenses are indicative of costs while employees do their work. In essence, you are allowed to reimburse your workers in performance of their duties. But the employees have to provide detailed receipts.
When processed correctly, such expenses can be reimbursed tax-free to your workers. This is important to help maintain their morale. None of your employees appreciate getting a negative surprise from the IRS.
Either workers must have paid or have sustained deductible-business expenses while on the job. Again, the expenses must be business-related.
Note: If you pay workers for activities not related to their work, the IRS will consider the expenses to be part of their compensation which means they’re taxable.
Employees must be thorough
If employees aren’t transparent and thorough, this leads to headaches.
Workers should submit a detailed expense report including the dollar amount of the expenses, where money was spent and the nature of the expenses.
This necessitates receipts, canceled checks, credit-card receipts or other detailed verification.
Companies can use the new de minimis safe harbor rule for business expenses that are as high as $75. This means they can be reimbursed tax-free without having to provide receipts. The old de minimis amount was $25. (For more, see the IRS and de minimis rule.)
Be certain that an IRS auditor can look at your documentation and easily see that it represents a legitimate business expense.
If employees fail to report details of an expense within a “reasonable time,” it will be deemed an “excess” reimbursement.
You will experience a hiccup if you advance payment to an employee without adequate documentation. Both you and your employee would have to pay tax on the amount.
Here’s how the IRS views it:
The employee can be reimbursed within 30 days of incurring the expense, and provide documentation within 60 days. The excess reimbursement should be paid within 120 days.
Developing an accountable plan
In essence, here are the rules for an accountable plan:
Employees have to provide original receipts. If originals aren’t available, the vendor can create a receipt showing their name, the date and expense amount.
Employees are not allowed to alter the receipts. If they do, it will be investigated for possible fraud. The receipts are considered the property of the employer.
Employees must provide an adequate explanation if they submit copies of the original receipts.
A company manager or chief accountant must get involved, thoroughly explain why copies were submitted and include adequate documentation.
The types of expenses to be recognized as business-related
The typical expenses:
Petty cash expenses: They are typically small expenses less than $75 sans a receipt (subject to the de minimis rule).
Entertainment and meal expenses: They must be “ordinary” and vital to business operations. Ordinary expenses are helpful to the company.
Meal expenses are not allowed if they’re for extravagant dining; if the worker or boss isn’t not in attendance at the meal; and/or if the employee’s spouse is present without a good business reason.
Using IRS form 1120, employees can deduct 50 percent of the cost of the meal.
Entertainment expenses are no longer deductible. You’ll have to decide whether you prefer that your employee entertain clients. But you’ll have to reimburse the employee without being able to write it off.
If, for example, your employee entertains clients at a concert or sports event, the price of the tickets must be separated from food and beverage receipts, which can be deductible.
Other than food and beverage, entertainment expenses such as the tickets, mementos or souvenirs cannot be reimbursed or written off.
Travel expenses: Travel reimbursement for business is acceptable to the IRS.
In overnight travel, every expense is reimbursable. Business-related expenses when an employee travels for personal reasons can be reimbursed tax-free.
If it’s cheaper for employees to travel for the weekend than it would be for an over night trip, all expenses are reimbursable which happens a lot in airline travel. The additional time isn’t deemed to be a personal trip.
If a spouse accompanies the employee, only the expenses related to business are reimbursable.
Regarding per diem allowances: You can mingle per diem and direct reimbursements when reimbursing employees.
Of course, a per diem is a fixed amount for each day the employee travels. Any hotel, meal and incidental per diem rates can vary depending on the location. Employees do not have to document every per diem expense.
A shorter way of tallying the federal per diem rate is the use of high-low rates in per diems. Beware, however, lodging, meals and incidentals can’t be used with this method.
How regular per diems are beneficial
Meals: If your employees are away overnight for a business reason, meal expenses are reimbursable.
At all-day workshops and seminars, there must be a legitimate reason for the benefit of your company when paying for anyone else.
Vehicle expenses: Note there multiple things to remember.
Car usage is reimbursable at the standard IRS mileage rate. As of 2021, the rate is 56 cents per mile.
With your telecommuting employees, the travel expense from their home to your primary office is reimbursable.
Also, expenses are reimbursable tax-free if employees are required to visit the office or other sites, such as seeing clients or attending workshops.
Other reimbursable travel expenses: Employees who travel for business-related work is permissible even if it’s just for one day.
For travel to a temporary location, tax-free reimbursements are permissible up to one year. However, if the travel takes longer than 12 months, the expenses are taxable because it’s no longer considered a temporary location.
Cell phone expenses: If you have a non-compensatory reason for requiring employees to use your equipment, employees’ business use is reimbursable tax-free.
For example, if you must be able to reach your employees or if you have clients your employees have to call or text, it’s OK. You don’t necessarily have to keep records for such business or personal use of the phone.
Note, however, you are only allowed to reimburse your employees for the basic monthly calling and data use. Again, the expense must pertain to the operation of your business.
Cell phones are not to be used as perk for employees in non-compensatory reasons, which requires records to be kept.
Remote work from home expenses
For Internet use, you can reimburse tax-free your employees who work from their homes. Employees need to record their online business use.
Expenses such as ink and paper are reimbursable, but you must require employees to provide receipts.
From the Coach’s Corner, here are related tips:
Tips on Understanding the Mindset of IRS Auditors — An IRS audit is enough to make you tense with cold sweat in the palms of your hands. More businesspeople have complained to me about the mean-spirited treatment at the hands of IRS agents than any other federal agency.
12 Tips So You’re Less Likely to Fear an IRS Audit — The key to dealing with an IRS audit is to have done your homework. If you do all your homework, you don’t have to fear an audit.
Tips to Guarantee You’re Complying with IRS on W-4s — When it comes to withholding, are you in compliance with the Internal Revenue Service? With the changes brought by the Tax Cuts and Jobs Act, it’s important to review your payroll approach.
How Employers Can Help Workers on Pay Withholding — If your employees need help understanding W-4s for their income taxes, you can assist them without intruding too far. Here’s how.
Management Responsibilities if Employee is FMLA Eligible — There are guidelines required of your business if your employees think they’re eligible for FMLA. See these business tips.
“People who complain about taxes can be divided into two classes: men and women.”
-Unknown author, from the IRS