Is An Employee’s Reimbursement For Business Travel Ever Taxable?
The reimbursement for business travel may or may not be taxable depending on the type of plan an employer has.
There are two types of plans:
- Accountable Plans – An accountable plan is not taxable to your employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of social security, Medicare, and Federal Unemployment (FUTA) Taxes.
- Nonaccountable Plans – A nonaccountable plan is taxable to your employees and is subject to all employment taxes and withholding.
(Nontaxable to your employee) In order to qualify as an accountable plan, your reimbursement or allowance arrangement must require that your employees meet all three of the following rules:
1) The expenditure must be business related. This means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his/her 1040 income tax return.
2) There must be “adequate” accounting by the recipient within a reasonable period of time. This means that your employees must verify the date, time, place, amount and the business purpose of the expenses. Receipts are required unless the reimbursement is made under a per diem plan.
3) Excess reimbursements or advances must be returned within a reasonable period of time. Reasonable depends upon facts and circumstances.
(Taxable to your employees and are subject to all employment taxes and withholding) Your payments would be considered treated as paid under a nonaccountable plan if:
1) Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation.
2) You advance an amount to your employee for business expenses and your employee is not required to and does not return timely any amount he or she does not use for business expenses.
If the expenses covered by this arrangement are not substantiated or amounts in excess of expenses are not returned within a reasonable period of time, the amount is treated as paid under a nonaccountable plan. This amount is then subject to income tax withholding and payment of social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period.
Excerpts regarding taxable travel were taken from the IRS Website on 01/25/10. For more detailed information please refer to Publication 15, Circular E, Employer’s Tax Guide; Publication 1542, Per Diem Rates; Internal Revenue Code § 62(c); and Treasury Regulation 1.62 and 1.274.