Business taxes are often considered the tricky part for a finance team. You can have questions about various laws and rules, which can lead to confusion. Is this payment taxable? Can we claim a deduction? During the tax season, you can hear such questions, if you happen to pass by your friendly accountant’s desk.
To add to this list, we have employee reimbursements, often overlooked in most companies. Improper management of T&E expenses can lead to poor employee experience and a loss of money for your company.
In this article, we discuss the tax rules and regulations around employee expense reimbursements. We also explore the importance of expense management software in helping you manage your taxes.
Are employee reimbursements taxable?
Like everything else in taxation, the answer to the question is – It depends!
If you have an accountable plan, reimbursements aren’t taxable if a single payment is made. All you need to do is specify the amount of refund in your reports.
An accountable plan is one which has the following characteristics:
- Employees can be reimbursed only for expenses, which are necessary business expenses. The delivery of business duties justifies such expenses. You cannot reimburse the amount which would typically be a part of employee wages.
- The employee has to substantiate the incurred costs within a reasonable period. The substantiation has to happen in the form of a log, a report, or an entry.
- After reimbursement, employees have to return any amount that they might have got over the substantiated expenses. They need to refund these amounts within a reasonable period.
What is a reasonable period?
For both points 2 and 3, the IRS Publication 15 outlines the need for a reasonable period. A reasonable period varies, but general guidelines exist.
The benefits of adopting an accountable plan:
- First, these reimbursements aren’t taxable. Employers don’t have to withhold or contribute to income, social security, Medicare, and FUTA taxes.
- If employees fail to comply with the requirements listed in an accountable plan, then you aren’t liable to reimburse them. It helps you ensure that compliance levels are high and fraudulent expenses are low.
In case you opt to go for a non-accountable plan, you will have to deposit income taxes on reimbursements made to the employee. You are also required to report the reimbursements and taxes on the employee’s form W-2.
- Usually, the employee should receive their reimbursements within 30 days of them incurring those expenses.
- They should account for expenses within 60 days of incurring such expenses.
- They should return any amounts in excess within 120 days of incurring those expenses.
The role of expense management software in taxation
- Regardless of whether you opt for an accountable or a non-accountable plan, you will want to implement a system that allows you to track employee expenses. An expense management software helps both you and your employees to track and report expenses with ease.
- In the case of an accountable plan, employees must substantiate their reimbursable expenses in the form of a log, journal entry, or in another form to the employer. An expense management software with mobile capabilities can work wonders in such a case.
- In case of a non-accountable plan, you are still required to report reimbursements in the employee’s form W-2. This practice makes it beneficial to have an expense tracking software in place, which can make sure you don’t lose track of reimbursements.
- One of the more critical aspects of taxation is your company’s expense policy. You might have a clear policy of not reimbursing certain types of expenses. For non-accountable plans, paying taxes on expenses that fall out of your policies is a complete operational waste.
Helps in identifying the purpose of business spend
A sufficiently modern expense management software tracks enough information to ascertain whether an expense is for business purposes. For example, Fyle can track things like whether an expense is a weekend expense. If the employee was on company-sanctioned business travel, then it might be a business expense. Alternatively, it is highly unlikely that a weekend or a holiday expense is a substantiated business expense.
Helps employees track and substantiate expenses with ease
Most expense management software come with a receipt tracking app for reporting expenses. These receipt scanning apps help employees substantiate their reimbursement claims with proof of costs incurred. The company also benefits from such proof as they can stay compliant with the requirements of an accountable plan as specified by the IRS.
Helps in tracking the turnaround time for the process
Any company which is under the accountable plan needs to track their estimates of a reasonable period. It is necessary to ensure they are on top of things. Expense management software can track the turnaround time required for the entire process. It also tracks the time spent in each part of the reimbursement process as a whole.
For example, Fyle tracks:
- How old is an expense?
- How long did it take to approve the expense report?
- How long did it take to reimburse the employees?
- Fyle ensures that employees don’t delay report submissions. You can set policies to reject reimbursement of expenses which don’t get reported in a reasonable period
We have seen that to manage taxes for employee reimbursements; you need an expense management software. Regardless of whether you are on an accountable plan or a non-accountable one, you will need an expense management software.
For an accountable plan, you will need it to make sure you are compliant with IRS guidelines. For a non-accountable plan, you will need it to report the total amount of reimbursements made to employees. Of course, there are benefits of using an expense management software, which is beyond the scope of this article.
Would you like to see how Fyle can help you in managing employee expenses? Schedule a demo with us today to learn more.