Let’s start off by asking a question to get you thinking: What do fuel, tuition, and office supplies have in common? They are all common reimbursements that are often reimbursed through an employee’s paycheck. So what is a reimbursement? It’s simply the compensation to someone for an out-of-pocket expense they incurred through being employed or doing something for another party. There are two very different types of reimbursements. They are accountable and non-accountable reimbursements.
So what does accountable mean in terms of reimbursements? Well, it’s explained in three simple conditions. The first one is the expense must be for the business. The second is there must be adequate record of the expense. The third is employees must return any amount back to the employer that exceeded the expenses. Accountable reimbursements do not count towards income that is shown on employee’s W-2’s; therefore, it is not taxable.
The Three Conditions:
- Must be a business expense: The expense must have a connection to the job of the employee.
- There must be a record: The IRS describes adequate record as substantiation. Substantiation can be receipts or invoices that clearly state the expense.
- Any excess must be returned: Any amount in excess of the reimbursed expense must be return to the employer within a reasonable time. The term “reasonable time” is important here. As an employer you must set a time for the excess to be returned.
When an employee has no record of an expense that is to be reimbursed, it’s considered a non-accountable reimbursement. All three conditions mentioned in the accountable section have to be met in order for the reimbursement to be an accountable reimbursement. If it is just one condition shy of meeting all three it will be considered as non-accountable. Non-accountable reimbursements are taxable and are included in W-2 income.
Reimbursements are a part of being an employer. Knowing the details about accountable vs. non-accountable can save employers and employees from confusion. As an employer you can do either type of reimbursements as accountable or non-accountable. Just keep in mind that the main difference between them is that one is taxable while the other is not.