employee expense reimbursements: compliance … practices for employee expense reimbursements-what...

Employee Expense

Reimbursements:

Compliance Workshop

Mindy Harada

PricewaterhouseCoopers

[email protected]

Best Practices for Employee Expense

Reimbursements-What we will cover

� Accountable versus Non Accountable expense reimbursement

� Travel Expenses

� The Use of Per Diems

� Reimbursement of Pre-Employment expenditures

� Accounts Payable reimbursement versus Payroll Department reimbursement

Accountable versus Non Accountable

� Reimbursements of employee business expenses made under accountable plans can be excluded from an employee's gross income and are not subject to federal employment taxes.

� Reimbursements of employee business expenses made under nonaccountableplans are taxable wages, even if the business expenses are otherwise deductible


� Reimbursements under an accountable plan must be identified either by making the payments separately from regular wage payments, or by specifically identifying the amount that is a reimbursement payment if reimbursements are combined with regular wages in a single payment.


� What are the elements of an accountable plan?

� The plan must have a business connection by providing advances, allowances or reimbursements for deductible business expenses that are incurred by an employee in connection with the performance of services for the employer;

� The plan must require the employee to substantiate reimbursed expenses within a reasonable time; and

� The plan must require employees to return reimbursements in excess of substantiated expenses within a reasonable period of time.


� Business connection defined

� The business connection requirement is met if the plan provides payments for business expenses to be incurred by an employee in connection with the performance of services as an employee.


� An employee must substantiate reimbursed expenses within a reasonable period of time.

� This requirement is met by submitting sufficient information to enable the employer to identify the specific business nature of each expense and to conclude that the expense is attributable to business activities.

� Each element of an expenditure or use must be substantiated.

� An employee cannot lump expenses under one category such as ‘travel’. They must be detailed


� An employee may substantiate business expenses by furnishing the employer with documentary evidence such as receipts. Under the "adequate accounting" rules, employers must maintain the documentary evidence and produce it if requested by the IRS � Employers may take a deduction on business expenditures of $75 or more only if it is substantiated by receipts or other documentary evidence


� Meals and Entertainment

� Reimbursements or advances for business meals and entertainment expenses, if substantiated, are not considered wages subject to employment taxes despite the Code's deduction disallowance to the employer of 50% of the reimbursement


� Excess amounts must be returned within a reasonable time

� An accountable plan must require an employee to return within a reasonable time any amount paid in excess of the expenses substantiated by the employee. If an employee does not return amounts paid in excess of substantiated expenses, employers must withhold and pay employment taxes on the excess amount on the first payroll period after which the expenses are substantiated


� Electronic receipts are acceptable

� The IRS has ruled that an employer's expense reimbursement arrangement for deductible travel and entertainment expenses, which included new procedures for the use of electronic receipts and expense reports, qualified as an accountable plan.


� Advances for reimbursement must match anticipated expenses � When money is advanced under an accountable plan, the requirement that excess amounts be returned will be satisfied if the advance:

� is reasonably calculated not to exceed the amount of anticipated expenditures;

� is made within a reasonable period of time before the expenses are incurred; and

� requires the return of any excess over substantiated expenses within a reasonable time period after the advance is received.


� Reimbursed amounts must be substantiated and excess amounts must be returned within a reasonable period of time. The IRS has established two safe harbor rules that define a reasonable amount of time.

� Under the fixed date method, the reasonable amount of time requirement is met if:

� an advance is made within 30 days of the date an expense is incurred;

� the employee substantiates an expense to the payer within 60 days after it was paid or incurred; or

� the employee returns to the payer any excess amount within 120 days after an expense was paid or incurred.


� Under the periodic statement method, the reasonable period of time requirement is met if:

� The payer provides the employee with a periodic statement, at least quarterly, that states the amount paid under the expense allowance arrangement in excess of the expenses the employee has substantiated to the payer; and

� The payer requests the employee to substantiate the excess expenses or return any amounts remaining within 120 days of issuance of the statement


� Employment Tax Treatment

� Withholding on excess reimbursement amounts may be at supplemental rates

� Employers may add any excess reimbursement payments that are subject to federal income tax withholding to an employee's regular wages for a payroll period and compute the tax to withhold based on that total.

� Alternatively, employers may withhold income tax from the reimbursement at the flat 25% rate applicable to supplemental wages if the reimbursement or allowance is paid separately or separately noted if wages and reimbursements are combined.

Travel Expense Reimbursements

� Reimbursements for travel expenses or travel advances must be either be:

(1) paid separately from regular wages, or

(2) if combined with regular wages in one payment, identified separately as a travel reimbursement or advance.

� If the reimbursement or advance is not paid or identified separately, the amount will be treated as taxable wages to the worker.

Travel Expense Reimbursements

� If an employee does not substantiate travel expenses within a reasonable time, or if excess reimbursements are not returned within a reasonable time, employers must treat the amounts as wages.

� Employment taxes must be withheld at the first payroll period following the expiration of a reasonable amount of time.

� Federal income tax withholding may be computed as if the travel reimbursement were a supplemental wage payment, so long as the reimbursement or advance was paid separately or identified separately.

Travel Expense Reimbursements� The IRS has issued safe harbor tests to establish a reasonable amount of time

� The following fixed time periods will be found reasonable by the IRS:� Advance payments made no more than 30 days before an employee incurs travel expenses;

� expenses that are substantiated within 60 days after they are incurred or paid; and

� excess payments that are returned to the employer within 120 days after being incurred or paid.

� A reasonable period of time will be established under IRS rules if the employer issues periodic statements to employees at least quarterly about unsubstantiated expenses or unreturned excess payments. Employees must substantiate the expenses or return excess payments within 120 days of the statement.

Travel Expense Reimbursement

� The employee must provide a statement substantiating travel expense

� The substantiation must include the following information:� The amount of each separate expenditure for traveling away from home, such as costs of transportation or lodging. The daily cost of the traveler's own breakfast, lunch, and dinner, and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares;

� The dates of departure and return for each trip away from home, and the number of days away from home spent on business;

� The destinations or locality of travel, described by name of city or town or other similar designation; and

� The business reason for the travel or nature of the business benefit derived as a result of travel.

The Use of Per Diems

� Per diem allowances may be used as an alternative to employee statements to substantiate travel expenses.

� Per diem allowances paid from an accountable plan are not subject to FICA, FUTA, or federal income tax withholding.

� If the per diem rates are used, employees only have to account for time place and business purpose of travel.

The Use of Per Diems

� Under the per diem allowance method, the amount that is deemed substantiated is equal to the lesser of the actual per diem rate established by an employer for a locality or the amount computed under the federal per diem rate for the locality of travel for the period the employee is away from home.

� The federal per diem rate is equal to the federal lodging expense rate plus the federal meals and incidental expense rate for the locality of travel

� If the employer's per diem rate exceeds the federal per diem rate, the employee must substantiate expenses in excess of the federal rate or the unsubstantiated income will be treated as income.

Pre Employment Expenses

� Reimbursement for pre-employment expenses are not wages

� Allowances or reimbursements made to individuals by a prospective employer for expenses, such as transportation, meals, and lodging, incurred in connection with interviews for possible employment are not includible in the prospect's gross income and do not constitute remuneration for services rendered.

� Therefore, such amounts are not subject to federal income tax withholding, and they are not taxable wages for FICA or FUTA purposes

Pre Employment Expenses

� Reimbursement of agency fees after employment is wages� If an employee pays an employment agency fee, but is reimbursed for the fee by the employer after completing a specified period of satisfactory service, the reimbursement is in the nature of a bonus and is part of the wage structure of the contract of employment.

� Since it is paid in consideration for services rendered, the reimbursement is wages for purposes of FICA, FUTA, and federal income tax withholding

Accounts Payable Reimbursement vs

Payroll Department Reimbursement

� Accounts Payable

� Has to be aware of compensation versus expense

� Relocation/moving is always an issue

� The use of third party relocation companies

� Travel expense reimbursement

� What is excess per diem

� How does Accounts Payable communicate compensation items to Payroll

Accounts Payable Reimbursement vs

Payroll Department Reimbursement

� Payroll

� Is Payroll aware of all employees paid through AP?

� Once Payroll receives notification that payments have been made, how do you handle compensation items

� Gross up

� Employee pays tax

Best Practices

� Communication is key

� AP payment could require Payroll sign off

� Centralized approval of employee payments/reimbursements

� Payroll could handle actual payment after all department approvals have been obtained

Question & Answer Session

� Have a question for the speaker? Press “Star” and then “1” on your phone to enter the queue.

� If, during the Q&A, your question has been answered, or you wish to remove yourself from the queue, press “Star” and then “1”.

� The moderator will open your line when it is your turn to speak.

� For more information regarding Business Management Daily’s newsletters, forums, webinars and Special Reports, please visit: www.BusinessManagementDaily.com.

� We’d love your feedback regarding the conference and other topics you’d like to hear about! Contact: [email protected].

Thank you for participating!

employee expense reimbursements: compliance … practices for employee expense reimbursements-what...

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