Employee expense reimbursements can have significant tax implications for the company and employee, so building a comprehensive plan is important.
Business expenses are often paid for by employees, then reimbursed by the company. These reimbursements have can have significant tax implications for the company and the staff member, so making sure you have a comprehensive reimbursement plan in place is important. Continue reading for how to go about reimbursing employee expenses correctly.
Creating a Reimbursement Policy
Your plan should outline what expenses are reimbursable; what documentation you will require in order to reimburse the employee; and how the reimbursement will be made (i.e. direct deposit, mailed check or otherwise). Additionally, inform employees about any tax implications for reimbursements, particularly under the new tax guidelines.
A best practice for setting up a program is to inform employees what expenses can be reimbursed and at what rate (see below). Equipment purchased for the business would be reimbursable, for example, but tools for their own toolbox (which they would take with them if they leave your employer) would not be.
Depending on the expense incurred, the amount you reimburse may be subject to taxes. If that occurs, you will need to include the monies as taxable income and withhold any required deductions: including these on the employee’s W-2 form is appropriate. For expenses that are not subject to tax, a separate reimbursement check can be utilized.
Unless you utilize a non-accountable plan, employees should know they must surrender a receipt to be reimbursed. You might create a schedule on when receipts have to be submitted in order to be paid – for example, within 2 weeks of the incurred expense. You’ll also want to advise employees on how long they can expect to wait to be compensated. A best practice might be to mirror the dates: 2 weeks to turn in expense reports; 2 weeks to be compensated. Creating consistency and clarity around these processes will make the process easier for your team to abide by and understand expectations.
Accountable versus Non-Accountable Plan
There are two types of reimbursable expense plans under federal tax guidelines. Accountable and non-accountable plans: the differences between the two are stark and can have significant tax liability consequences.
For accountable plans, employees are reimbursed for business-related expenses only when they provide receipts for the expenses and are reimbursed for the exact dollar amount. These funds are considered business expenses and are not taxable to the employee in any way.
With non-accountable plans, the employee is given a specific amount to spend and no receipts are required. A common example of these is a food allowance for employees traveling on business. Companies can provide a set amount, like $75.00 a day, for the employee to utilize on meals. If the employee goes over the amount it would be their responsibility to pay the difference. If they don’t spend the entire amount, they’re allowed to keep any remaining monies. In either case, they are not required to show receipts for the amount they’ve spent. The extra cash is a type of consideration for their travel. For non-accountable plans, the funds provided are considered taxable income (although the employee may be able to deduct them on their own personal tax return). They will need to be reported as income and are subject to employment taxes, including withholding, FICA, federal and state unemployment taxes, to both the business and the employee.
Under the new Tax Cuts and Jobs Act, many formerly allowed expenses are no longer allowed. So even if you have a current reimbursement plan, it’s important to review it under the new guidelines.
Business-related meals and entertainment have taken a significant hit under the TCJA: prior to its enforcement business-related meals and entertainment were deductible at 50% of their cost: starting in 2018 they are disallowed. However, meal reimbursements for employees who travel continue to be deductible at 50%.
Unless they are members of the military, and then with specific exclusions, reimbursing employees for moving expenses is no longer tax-free. The amount provided to employees to move from one city to another is now considered taxable income and must be included on the staff member’s W-2.
Payroll Providers and Reimbursements
If your company utilizes an outside service to manage payroll, you’ll need to advise them specifically when a reimbursement is being included in an employee’s check. If the reimbursement is subject to tax (like moving expenses), they will need to deduct the necessary withholding amounts. For non-taxable reimbursements, a best practice would be to reimburse the employee with a check from the business account: particularly if the reimbursement is for business-related tools or equipment.
Carefully outlining and monitoring your reimbursement policy should be ongoing: to keep up with changes in the tax codes, and to keep a close eye on the expenses your business is incurring. When you integrate your payroll system into your employee HR system of record, tracking employee payroll processes is easier than ever. Discover how Zenefits eliminates the manual tracking out of your payroll processes by requesting a demo today.