On a daily basis there are several transactions that take place in a business. Most important of them are income and expenses. While conducting business employers pay for various expenses that help in running the business smoothly. Likewise, not only employers but also employees incur some business expenses for which they are liable for reimbursement. Let’s understand the concept of employee expense reimbursement in brief here.
Meaning of Expense Reimbursement
Expense reimbursement means the money that an employer pays back to his employee after he has spent his own money for some business-related work. After the employee has received the reimbursement amount they are not required to report such amount as wages or income.
When can Such Reimbursement Occur?
Employee expense reimbursement can occur when an employee travels for business work such as meeting the clients or visiting the bank. He spends on food and entertainment when in a different city for business work for a night or more. He can also make the business-related payment to the courier boy, while purchasing some work-related tools, etc. An employer is liable to reimburse such expenses to the employee.
What Types of Expenses Qualify for Employee Expense Reimbursement?
The following types of expenses are qualified:
- Business Connection: Any expense incurred by an employee that has a direct connection with business purposes is qualified expenses and the employee when in service must incur such expenses.
- Substantiation: Any expense incurred by the employee shall be reimbursed only after the presentation of valid evidence of the amount, place, time, and business purpose by the employee. The evidence must be presented before a reasonable period of time.
- Returning Excess Amount: The employee is liable to return any extra payment made by the employer while reimbursing the amount paid by the employee within a reasonable period.
Implementation of an Accountable Plan
An employer must have an accountable plan in order to reimburse employees expenses if related to the business. if an employer does not have a proper accountable plan then as per the IRS Publication 15 such payments shall be considered as wages and shall be subject to the withholding and payment of social security, FUTA taxes, Medicare, and income. Such expenses in the absence of an accounting plan shall be a taxable income in the hand of employees. Therefore employer must draft an effective accountable plan to save stress, confusion, and everyone’s time. Also if the employee fails to submit and valid evidence of the expenses incurred or does not pay the extra amount paid by the employer then any reimbursement made by the employer shall be considered as income in the hand of employee and shall be taxable.
Conclusion
For availing the benefit of reimbursement employees must timely substantiate expenses and return the excess reimbursed amount received within a reasonable period. Also an employer must comply with all the IRS regulations related to employee expense reimbursement and maintain an accountable plan. Employers must have a business accountant who can take care of all such transactions.
