There may be times that you must reimburse and employee for expenses that they have incurred for travel, meals and entertainment. For the expense to be deductible the same way it would be as if the business paid for the expense, it needs to be paid under an “Accountable Plan”. As a Small Business Accountant and Bookkeeper, it’s important for me to inform my clients of topics like this.
“An accountable plan requires your employees to meet all of the following requirements. Each employee must:”
- “Have paid or incurred deductible expenses while performing services as your employee”
- “Adequately account to you for these expenses within a reasonable period of time, and”
- “Return any excess reimbursement or allowance within a reasonable period of time.”
What this means is that you need the employee to provide you with the following information in order to receive a reimbursement:
- “Documentary evidence of their travel, mileage, and other business expenses.”
- “Evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or a similar record in which the employee entered each expense at or near the time the expense was incurred.”
Any excess amount of the expense MUST BE RETURNED or it will be includable on their W-2 as wages. Y
If these provisions are not followed, the reimbursement MUST be added to the employees wages on their W-2 (which means the business will have to pay employer payroll taxes on this amount). So you have to BE STRICT in gathering this information PRIOR to reimbursing them.
If the expense falls under the “nonaccountable plan” you will need to inform your payroll specialist as soon as possible to add it to their wages.
Use your small business accountant or bookkeeper to help you put a good process in place to insure you get the maximum deduction for your employees reimbursable expenses.
Use this link to read more about this accountable plan. Publication 535 – Business Expenses Section 11.