Rules For Expense Reimbursements

Expense Reimbursement Training Courses

What Is An Expense Reimbursement?

Employees frequently pay company expenses - such as automobile, travel, meal, or entertainment expenses - out of their own pocket, and then ask for reimbursement.

What is an expense reimbursement? Generally speaking, to qualify as an expense reimbursement:
  • The expense must be for deductible business expenses that are paid or incurred by an employee in the course of performing services for your organization
  • The employee must be required to substantiate the amount, time, use, and business purpose of the reimbursed expenses
But with regard to payroll, are these tax-deductible expenses? The answer is: sometimes yes and sometimes no. If yes, are they taxable to the company? The employee? Don't make simple mistakes or not know the answer when determining whether and expense reimbursement is taxable or not. Read below re our "Basic Rules For Expense Reimbursements" - including our "Expense Reimbursement Policy Best Practices" - or click below to order our recommended expense reimbursement training course.

For Training On How To Handle Expense Reimbursements

Featured Course: Compliance Tips For Employee Expense Reimbursements

This course covers the rules and requirements for expense reimbursements, as well as best practices for processing expense reimbursements either in payroll or accounts payable, including:
    Expense Reimbursement
  • IRS expense reimbursement requirements
  • Whether employee expense reimbursements should be run through payroll or accounts payable
  • Which payments being made to your employees may be subject to payroll taxes
  • Accountable plan rules - and how they apply to employee travel and expense reimbursements
  • How employee business expenses made under accountable plans can be excluded from an employee's gross income
  • The accounting issues associated with the use of per diems
  • How to determine the scope and potential areas of focus for your audit
  • How to identify any areas of concern prior to an external audit or an audit by another group within your company
  • Common areas where mistakes or issues can normally be found
  • How a review can help you detect internal control issues
  • Where to go to for assistance so you're not re-creating the wheel
  • Devising a game plan on what you want to review and how to divide and conquer
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Basic Rules For Expense Reimbursements

IRS and DOL rules allow employers to pay back employees who have spent their own money for business-related expenses.

Most expense reimbursement plans are set up as an "Accountable Plan." An Accountable Plan allows the employee to either receive and advance/allowance or be reimbursed for expenses under the following conditions:
  • The expense must be in connection with the performance of services as an employee
  • There must be receipts and invoices that document the nature and amount of the expenditures
Taxability Of Reimbursement Of Expenses To Employees: Are Expense Reimbursements Considered Income? Do Expense Reimbursements Get Taxed?

Business expense reimbursements are not considered wages, and therefore are not taxable income (if your employer uses an accountable plan).

What Is An Accountable Plan

An accountable plan is a plan that follows the Internal Revenue Service regulations for reimbursing workers for business expenses in which reimbursement is not counted as income.

Note: If your business uses an accountable plan but an employee fails to follow the plan, the expense reimbursement is taxable.

Which Employee Reimbursements Are Non-Taxable?

According to Paychex, the following reimbursements are generally non-taxable:
  • Approved employee business reimbursements that conform to IRS guidelines
  • Educational reimbursements up to a maximum $5,250 per year
  • Specific insurance premiums including: up to $50,000 in group life insurance coverage, accident and health benefits, and employer's share of COBRA contributions
  • Gifts with a minimal value or awards such as plaques and trophies
  • Discounts of up to 20 percent on employer-provided goods or services
  • Retirement planning services that are offered as part of a qualified retirement plan
  • Meals or lodging provided on the work site, if specific guidelines are met
  • Using a company van for commuting, provided specific guidelines are met
  • Up to $265 per month worth of transportation-related fringe benefits such as free parking, van pooling, or transit passes
Requirements For Expensing Meals And Travel

Company policy may provide a per diem allowances for meal and/or lodging expenses during travel. For companies not using a per diem allowance, the IRS requires the following documentation:
  • Who was there?
  • Why the meal was considered official business?
  • When did the meal occur?
  • Where did the meal occur?
  • What was the cost of the meal?
For reimbursement for travel, the IRS requires the following documentation for each trip:
  • The reason for the travel expense
  • The date of travel
  • The number of miles driven
  • Beginning and ending odometer readings

Expense Reimbursement Policy Best Practices

What Should Be Included In An Expense Reimbursement Policy

Employers should make sure that any business expense should be substantiated before reimbursement is made.

Examples: Expense Reimbursement Policy Best Practices
  • In the case of mileage, a travel log prepared by the employee is acceptable
  • For ease of tracking, ask employees to use a mobile app to input all business-related expenses for reimbursement
  • Receipts can be scanned and saved to reduce paperwork
An expense reimbursement policy should include:
  • The type of expenses that employees can claim
  • The preferred time period for employees to submit expenses
  • The process for submitting/requesting reimbursement
  • The process for returning excess reimbursements or allowances
  • An internal system for collecting, verifying, validating, and paying employee expense claims
Last, all reimbursements, including for credit card purchases and travel, should be reviewed and paid by someone other than the purchaser. To avoid the need and time required to reimburse employees, employers should consider providing employees who purchase items on a regular basis a business credit card (along with a request to maintain separation of duties).
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