Employee Reimbursements: When are they taxable and when are they nontaxable?

Whether it’s supplies for the office, travel expenses or a business lunch, employee reimbursements are now commonplace for employers.  Determining when those reimbursements are subject to taxation and when they are nontaxable is an employer’s responsibility and can often seem like a daunting task.

According to the Internal Revenue Service, employee reimbursements fall into two categories: accountable and non accountable plans.  The IRS also provides employers with guidelines so they can best determine which plan to use for your reimbursement.

Reimbursements under accountable plans are nontaxable.  In order to qualify, the employee must provide documentation and/or receipts and return any unspent funds to the company.  For example, an employee purchases a plane ticket with a personal credit card for an out-of-town meeting.  The employee than submits the receipt and is reimbursed the exact amount of purchase.

Reimbursements under nonaccountable plans are counted as taxable wages.  For these reimbursements, employees are not required to provide receipts or return unused funds.  For example, an employee is given $50 in order to purchase supplies for a presentation and does not provide any receipts or return any portion of the funds unspent.

An easy illustration can be made using employee meal reimbursements.  An employee is given $10 for lunch in cash.  If the employee provides both the receipt for that lunch and any unused portion of cash, then the lunch falls under an accountable plan and is nontaxable.  If the employee does not provide a receipt or return the unused portion of the cash, this lunch would fall under a nonaccountable plan and should be counted as taxable wages.

Every employer encounters different challenges in regards to employee reimbursements so if you have any questions or would like further information, please contact BCN Services and we would be happy to assist.

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Dani Austin, Payroll Supervisor