Every organization incurs certain expenses which are part of operating the business. These costs can include rent, utilities, and other overhead costs. Employees may also incur expenses to help with their day-to-day operations. These expenses might include supplies for work, meals and entertainment for staff or client meetings, transportation costs, and more. As more and more companies start to move toward fully-remote or hybrid options for their workforce, costs for each employee’s home office may also need to be considered.
Accountable Reimbursement Plans
Properly accounting for these expenses can be a tricky process, especially when trying to determine whether the amounts should be taxed or considered as a form of income to employees and included as an item in their payroll. Or, are they truly non-taxable and reimbursable costs that can be handled by the accounts payable department? The first thing to determine is whether the company has an accountable plan when it comes to employee reimbursements. To qualify as an accountable plan, the IRS has a few requirements.
If an accountable plan exists, and the product or service is a valid and legitimate need for the business, chances are, the associated costs are likely to be recognized by the IRS as a non-taxable item to the employee. If not provided for by the company, the employee may file for reimbursement, given they are substantiated within a reasonable period of time. This is pretty straightforward when it comes to things like supplies or materials needed by employees to perform their work.
De Minimis, Or Not?
However, not everything is that simple. Instead of requiring employees to use their own cell phones for work, some companies might provide employees with company cell phones. Other companies may provide employees with access to company vehicles for use by employees required to travel to different sites, to save wear on employees’ personal vehicles. An employer may do this as a way to avoid dealing with the issue of reimbursing employees for using their own devices or vehicles. There may be specific rules and exceptions for some types of expense reimbursements that might require the business to treat them a certain way when it comes to payroll. While using a company phone for personal communication can be treated as a de minimis fringe benefit, personal use of a company vehicle can require the cost of mileage (based on a pre-determined rate per mile), parking fees, and tolls be included as taxable income. The mileage rate is subject to change by the IRS and is generally updated with each calendar year. Some employers may also choose to reimburse or cover the cost for meals but should take special care to make sure the cost of the meals actually qualifies as de minimis or qualified non-taxable expenses.
Expense reimbursements can be complicated and confusing, and it’s easy for a business to misclassify reimbursements in the wrong category when it comes to taxation. The payroll experts and Valor Payroll Solutions can ensure your business is compliant with the ever-changing IRS rules and make sure items are recorded and treated properly in payroll. Contact us today and let us help take away the stress of payroll.
