Ensure your reimbursement of business expenses is legally compliant.
by Ves Som
Do your employees use their own vehicles for business-related travel? Does your organization reimburse employees for business expenses? Do you require receipts? Do you have a written reimbursement plan? The answers to these questions will in part determine whether reimbursements to your employees for business expenses are included in taxable income and subject to income tax withholding, social security, and Medicare. To avoid having reimbursements treated as taxable income, employers must establish and follow an accountable reimbursement plan consistent with IRS regulations.
An accountable plan will meet all three of the following conditions: (1) the expenses must have a business connection; (2) the employee must adequately account for the expenses within a reasonable time period; and (3) the employee must return excess allowances within a reasonable period of time. The plan may allow for per diem amounts in lieu of reimbursement.
Accountable reimbursement plans are especially critical for tax-exempt organizations since excess payments to employees are not only subject to treatment as taxable income, but also, under certain circumstances, as private inurement or excess benefits subject to excise taxes and scrutiny of an organization’s tax-exempt status. Please contact us on our website or at info@baalegal.combaalegal.com for more information about reimbursement of employee business expenses.