How to Handle Employee Reimbursements and Advances

Do you ever have employees make purchases for you that need to be reimbursed? These payments may or may not be considered wages subject to payroll taxes. A reimbursement or other expense allowance arrangement is a system that an employer uses to pay for employee business expenses.

Arrangements include per diem and car allowances. A per diem allowance is a fixed amount of daily reimbursement the employer gives for lodging, meals, and incidental expenses when the employee is away from home on business. A car allowance is an amount the employer gives for the business use of the employee’s car.

If you use an accountable plan in your business, reimbursements are not considered wages, nor are they subject to payroll taxes. To be an accountable plan, the employer’s reimbursement or allowance arrangement must include all of the following rules:

  1. The expenses must have a business connection — the employee must have paid or incurred deductible expenses while performing services as an employee of the business
  2. The employee must adequately account to the employer these expenses within a reasonable period of time (using receipts as proof of charges).
  3. The employee must return any excess reimbursement within a reasonable period of time if advanced money to cover costs.

An excess reimbursement or allowance is any amount an employee is paid that is more than the business-related expenses that was adequately accounted for to the employer. If the reimbursements meet the three rules for accountable plans, the employer should not include any reimbursements as income. Any amounts over the accounted for expenses not returned to the employer is taxable income.

To guarantee the advances/reimbursements are not taxable, make sure all rules are followed, and any amount advanced over the accounted for expenses should be returned to the employer.