Probably one of the most common questions we receive from small business owners is how to reimburse expenses, especially related to mileage and vehicles. The tax treatment depends on how the entity has designed the plan for their employees. The two different plan types are listed below with some further detail of each.
“Accountable” reimbursement plans
An accountable plan is one under which an employer reimburses employees for employment-related expenses but requires the employee to substantiate the expenses. This means the employee must submit to the employer an expense record indicating the expense amount, time and place, business purpose, and business relationship to anyone else involved (e.g., a client, supplier, etc.).
The most common way that employers reimburse under “accountable” reimbursement plans is through use of the standard mileage rate issued and indexed annually by the IRS. This rate is 56.5 cents per mile in 2013. The employee cannot receive “flat” amounts over and above the mileage rate for insurance, gasoline, payment, etc. without these amounts being reportable as additional compensation under a non-accountable plan even if receipts are provided. The 56.5 cents is meant to cover all of the expenses of driving an automobile except parking and tolls, rather than require receipts for all expenses incurred with the use of the vehicle.
If employees are reimbursed for expenses under an accountable plan, the tax treatment is simple. You need to do nothing in regard to the employees taxable wages. The reimbursement or allowance would not be included in the employee’s income on the W-2 form issued to the employee at the end of the year. It also means that these expenses are deductible by the entity.
It is important to note that under any reimbursement plan, mileage commuting from an employee’s home to the employer’s business location is personal and not business mileage and should not be reimbursed at all by the employer. If the employee drives in excess of their normal commute or makes business calls from the office to another business site, this is considered reimbursable business mileage.
It is also important to note that, although some expenses are allowed to be estimated for tax purposes, this same rule does not apply to travel, meals and entertainment expenses. Therefore, maintaining good records for an accountable reimbursement plan for these expenses is vital.
“Non-accountable” reimbursement plans
If an employer doesn’t maintain an accountable plan, any expense reimbursements or allowances received from the employer should be included in wages on the W-2 form issued to the employee. For example, suppose an employee is paid $300 per month for business use of a personal automobile. The employee provides no “accounting” to the employer for any expenses, so $3,600 should be included on the employee’s Form W-2 and they are responsible for the taxes on these payments.
Jamie Lawson is a certified public accountant and a shareholder of the Bosma Group P.C. Contact her 775-786-4900 or jlawson@thebosmagroup.com.
