All companies incur expenses. Most of the time, invoices and statements are sent directly to the company for payment. However, there will be times when an employee incurs an expense on behalf of the company. For example, you might have sales representatives who spend four or five days every week on the road. You might need to ask an employee to use his own vehicle to pick up a potential client at the airport. An employee may need to travel to another city to be trained to perform the proper maintenance procedures for a new piece of equipment. Although you might be able to make certain arrangements in advance and pay for these expenses with a company credit card, there will always be some expenses that the employee will need to pay for as they are incurred. Meals, tips, taxi fares, tolls, parking and similar expenses cannot be prepaid, so you will need to reimburse employees for these incidental expenses. If the employee’s itinerary is subject to change, you may also need to reimburse him or her for lodging that cannot be paid for in advance.
On the surface, reimbursing employees for their business-related expenses seems straightforward. However, it is a bit more complicated than many people realize, and mistakes can have financial consequences for your employees and your company. If you reimburse an employee, you want to make sure that you can deduct the expense to reduce your company’s income tax, but you also want to make sure that the Internal Revenue Service does not mistake the reimbursements for taxable income received by your employee.
Examples of Reimbursable Expenses
Reimbursable expenses can fall into a number of different categories, but every expense must have a business connection. The expense must also be necessary and ordinary, which means that it is helpful to your company and commonly incurred by businesses in your trade or industry. Here are some of expenses typically considered as reimbursable employee expenses.
1. Transportation: Every employee should have a defined workplace. This can be the employee’s home, the company’s headquarters, a warehouse or a satellite office. The cost of commuting between the employee’s home and the defined workplace is not a reimbursable expense. However, required visits to client sites, travel to meetings held in a location other than the defined workplace, travel between multiple workplaces, and travel that requires the employee to be away from home overnight are typically reimbursable transportation expenses. Transportation costs can include airfare, car rental, rail tickets, fuel for vehicles, tolls, shuttle service, taxi fares and parking. If employees use their own vehicles, most employers prefer to use the IRS standard mileage rate. This rate is intended to cover all costs related to operating the vehicle, including fuel. It changes annually, but for 2019, the rate is $0.58 per mile. Furthermore, employees are still entitled to reimbursement for tolls and parking.
2. Travel: In addition to transportation expenses, employees who will be away from home overnight are entitled to reimbursement for meals, lodging, business calls, internet access and tips. The motel or hotel should itemize the bill so that personal expenses can be identified and excluded from reimbursement. For example, video and game rentals are considered personal expenses.
3. Meals: Meals are reimbursable if the employee is traveling away from home. However, expenses for meals and entertainment that are incurred in the home area are only reimbursable if the expense has a clearly demonstrated business purpose. Although the company is usually allowed to deduct only half of the cost of meals, the employee should be reimbursed for the total cost.
4. Supplies: Supplies purchased by employees for work-related purposes are typically reimbursable. Examples of supplies include paper for printers, business cards, ink cartridges and tools.
5. Communication: If you allow employees to furnish their own cell phones, you may reimburse them for all or part of their monthly bill, including their data plan. In some states, employers are required to reimburse employees for a “reasonable percentage” of these bills. For example, in California, employees who use their mobile phones for business-related calls must be reimbursed for those calls even if they have an unlimited plan and pay no additional amount for making or receiving the calls. You may also reimburse employees for all or part of the bill for internet service at their homes. In addition, if employees purchase a laptop, scanner, printer or other device to perform their job, you can reimburse them for the purchase.
Complying With IRS Regulations
You must comply with the guidelines established by the IRS if you want to protect your employees and your company. If a reimbursement becomes taxable income, it will increase the taxes for both the employee and the company.
1. You must establish an accountable plan. Without an accountable plan, you must treat all reimbursements as taxable wages. An accountable plan requires that all reimbursements are for business-related expenses that are substantiated. Substantiation means that the employee provides evidence of the time and date, amount, place and purpose. In addition, the employee must return any excess amounts received from the employer. For example, on Friday, you give a supervisor $200 out of petty cash to buy lunch for employees who will be conducting an inventory on Saturday. The actual cost ends up being $120, so the supervisor must return $80. If he does not return the excess, it becomes taxable income.
2. You are not required to use the standard mileage rate established by the IRS. However, if you pay a rate that is higher, you must treat the excess as taxable income.
3. You cannot use reimbursement to pay an expense incurred on behalf of someone who is not your employee. For example, suppose one of your employees needs to attend a training session in New York City and wants to take his wife on the trip. You cannot reimburse him for any of her expenses, including the price of her airline ticket, her meals, and the increased rate charged by the hotel for a second person. If you want to pay for her expenses, you can issue a check in her name to reimburse her, but if the amount exceeds $600, you will need to issue a 1099 in her name.
4. You have the option of reimbursing employees for their actual expenses for lodging and meals or paying a per diem. A per diem is a fixed daily allowance that can be used to reimburse employees for meals only or for both meals and lodging. The rate varies by city, and it can also vary by the time of year. For example, for 2019, the per diem is $149 for lodging, meals and incidentals for most cities in the United States. However, the total per diem for San Francisco is $346 from January 1 through September 30, increasing to $375 on October 1. If you choose the per diem method, employees must still submit an expense report that identifies the time period, location and purpose of the trip, but instead of entering individual amounts, it is only necessary to enter the total per diem allowance on each date. All expenses are deemed substantiated, so there is no need for employees to attach receipts. As long as the per diem does not exceed the federal rate, reimbursements are not considered taxable income, and the employee is not required to return any funds that are not spent.
As you can see, reimbursing employees for their business expenses can be a little complicated. State laws can add an additional layer of complexity. If you have an issue that you do not know how to handle, you should consult your CPA or attorney for guidance.
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