Travel Reimbursements
Throughout the last several
years we have seen an increase in reimbursements being offered by the business
sector. With this increase there is the likelihood that this will become
an area that is scrutinized by the Internal Revenue Service. Employers
providing employees with reimbursements for the most part assume that the
payment is not deemed to be compensation, thus free from income and payroll
tax. This may be the case. However, the government has established
guidelines and thresholds to limit the ability of employers to furnish tax-free
benefits to predominately highly paid employees.
Let's look at travel and
entertainment expenses and see where an employer may fall into a trap where
these supposed tax-free benefits might be taxable. Let's assume that
Company A has a sales force that is given a flat allowance per month for
reimbursement of travel and entertainment expenses pertaining to business.
The employees do not have to substantiate such expenses. In this
scenario, all payments to the employees for their travel and entertainment
allowances would be subject to income and payroll taxes.
The way to avoid the payments
being taxable as income to the employee and subject to payroll tax is to
establish an accountable plan. An accountable plan basically has four
requirements. Those requirements are as follows:
1. Business
Purpose. Any
amounts paid must be related to a business purpose.
2. Substantiation. The amount paid must be
substantiated by detailing the amount, time, place and business purpose.
Per diem charts, which apply to specific locations, are available in lieu of
receipts.
3. Reasonable
Allowance. Any
advance must be reasonably calculated and be paid within a reasonable time
period. Payment of an advance within thirty days prior to the expense is
deemed as reasonable. All expense advances should be paid separately and
identified as such.
4. The Return of
Unspent Allowances.
An employee who receives an allowance that exceeds substantiated
expenses must return the excess within a reasonable period of time. A
reasonable period of time is deemed to be 120 days after incurring the expense.
If you are a business owner and
reimburse your employees for travel and entertainment expenses, it is best to
make sure that you have a written accountable plan in place. This plan
should be made familiar to all of your employees. It is a simple way to
avoid tax ramifications on payments for reimbursements. If you would like
to discuss any of the above in further detail, please do not hesitate to contact us.
