Regardless of the size of your business, you incur expenses. Some of these expenses can reduce your taxable income. Reimbursing employees for their certain costs grant small businesses a tax deduction. The expense reimbursements are a common thing employers do to give their employee’s money back for spending on business-related expenses. The spending can be anywhere from travel for work to purchase of business-related equipment and supplies.
These expenses are also tax-deductible on the employee’s end. However, the reimbursements should not be reported as income. The Internal Revenue Service has accountable plans for employee reimbursements. Learn more about accountable plans here.
Expenses that Qualify Employee Expense Reimbursements
Generally, any expense that is related to business qualifies. However, your employees must provide you with evidence of the amount, place, time and the business purpose of the expense. You don’t necessarily need to provide reimbursements in case these are not fulfilled.
The most common reimbursed expenses are for supplies, meals, and transportation. Separating reimbursements from income is going to benefit both you and your employer when the tax season arrives. For example, if you’re giving an employee per diem, the payment made to the employee isn’t going to be taxable. However, if the per diem allowance you give exceeds the per diem rate of the state of travel, then the exceeding amount is going to be taxable.
Another common reimbursement is mileage reimbursement. If your employee(s) use their personal vehicle for business purposes, you can reimburse their mileage costs based on the mileage rate set by the IRS. As of now, the current mileage rate for business use is 57.5 cents per mile driven.
Including Reimbursement Payroll to Reimbursements
To report reimbursements, you’re going to use an accountable plan. But under an accountable plan, the reimbursed expenses must be related to business. If the reimbursed amount is more than the employee’s expense, the excess amount must be returned by the employee. This doesn’t have to be right away. Employees can return the excess amount within 120 days of the reimbursement.
Here is how you include reimbursements in payroll.
First, calculate the employee’s pay based on the hours or regular salary amount as normal. Then, calculate the required tax withholding on your employee’s gross pay for the pay period and deduct all required taxes such as the Social Security and Medicare tax.
Finally, add the accountable allowance or accounted for reimbursement after you done with the usual stuff. You can also include a description of the reimbursement amount on the pay stub to keep track of the reimbursements.