If your employees routinely spend their own money to purchase business-related items and then request reimbursement for them, it’s important to have an established policy for what’s covered and how to request money. This will save your accounting department time because they won’t have to review each individual expense to see if meets the qualifications for reimbursement. The most important consideration when creating a reimbursement plan is that all employee expenses must have a business purpose. In addition to incurring the expense for work, the employee must have used the item at work.
The IRS Doesn’t Require Reimbursement of Business Expenses
It surprises some employees and employers to learn that the Internal Revenue Service (IRS) doesn’t require business owners to reimburse expenses incurred by their employees under the Fair Standards Labor Act (FSLA). However, it does enforce the following regulations:
Reimbursement of business expenses cannot reduce wages for non-exempt employees below the state minimum wage.
Reimbursement of business expenses cannot reduce the overtime compensation for non-exempt employees.
Some amounts of reimbursement may count as taxable income for the employee.
You should also understand that some states do require employers to reimburse business expenses and that trumps federal law.
Common Reimbursable Business Expenses
Business expenses incurred during travel, including the cost of a round-trip flight, rental car, hotel room, and meals, are the most common types of expenses requested by employees and reimbursed by employers. You need to be especially careful as an employer to ensure the legitimacy of all travel expenses. For example, you don’t want to have to pay back an employee who racks up entertainment expenses in the hundreds or even thousands of dollars.
Reimbursement for tuition expenses, health insurance employees obtain on their own, uniforms, tools required to perform the job, and mileage for use of their own car are also common. It’s always a good idea to provide new employees with a copy of company policy regarding reimbursement to avoid them incurring an expense later and expecting reimbursement. Additionally, keep in mind that the IRS typically taxes trips, prizes, and services that you provide to employees as wages.
Consider Setting Spending Limits and Deadlines for Requesting Reimbursement
Unfortunately, some employees will attempt to take advantage of a reimbursement program without firm rules in place to prevent abuse. At Nolan Accounting, we recommend that you set limits for each type of expense. This will also make it easier for your company to meet its budget goals.
Although the IRS doesn’t require reimbursement of business expenses, it has guidelines in place to assist both parties. One of these is that the employee must request reimbursement and/or return any excess reimbursement within a reasonable timeframe. This is 60 to 120 days in most cases. Lastly, the IRS considers business expenses reimbursed under an accountable plan as non-taxable.
Although establishing an accountable plan and an employee reimbursement program can be complicated, Nolan Accounting is here to help. Please contact us to learn more about our services or to request an appointment.