Expense reimbursements are a critical part of your year-end, and year-round, planning. A sound expense reimbursement plan not only helps your business keep proper documentation, it also helps you remain in compliance.
What is Expense Reimbursement?
When we talk about expense reimbursement, we’re referring to paying your employees back for what they spent (of their own money) on business-related expenses. The IRS defines a business-related expense as any ordinary and necessary costs for carrying out your trade or business.
Your plan should clearly outline the specifics on what you pay or reimburse to your employees. In addition, it is required to be compliant with the IRS and Department of Labor.
Steps to Creating a Strong Expense Reimbursement Plan
An Accountable Expense Reimbursement Plan
Are reimbursements taxable? The IRS orders the following conditions must be met for your business expense reimbursement to be compliant:
When these three conditions are met, it’s referred to as an accountable plan. This is important to know, because if you have a non-accountable plan, the amounts reimbursed to your employees could be considered income and thus need to be included on the Form W-2. An accountable plan, on the other hand, allows reimbursements to not be considered taxable.
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The Five “Ws” and a Few Other Items
One of the key expenses often paid through reimbursement are meals. Employees can use per diem allowances, which are allowances or resources for lodging, meals, and incidental expenses. The General Services Administration sets per diem rates within the lower 48 states.
If you’re not using a per diem allowance, the IRS has specific requirements to substantiate actual meal receipts. It’s known as the five “Ws”:
Learn more about deductibility of meal and entertainment expenses and how the recent COVID-19 stimulus legislation removes the usual 50% limit on deducting business meals provided by restaurants in 2021 and 2022 and makes those meals fully deductible.
The IRS also has rules when it comes to automobile expense reimbursements. The policy related to automobile expense reimbursements must describe how your employees use a vehicle for business expenses on company time. This applies to both an automobile owned/leased by your company as well as mileage reimbursement and personal use.
Have employees who are using company automobiles for personal use?
Ensuring Your Expense Reimbursement Plan is DOL Compliant
The Department of Labor also has rules when it comes to expense reimbursements. These rules include:
Why Expense Reimbursement Matters for Your Business
As you plan for year-end, make sure your policy for employee reimbursement is compliant. By setting these rules in place, you’ll ensure your employees will not only have the information they need as they travel for work but also that your business follows the IRS and DOL regulations when it comes to the taxability of reimbursement of expenses to employees.
Make Your Business Dreams a Reality.
You’ve built a business and made your dream a reality now it’s time to explore how better to organize and/or outsource your accounting function.