Under an accountable plan, allowances or reimbursements paid to employees for job-related expenses are excluded from wages and not subject to withholding or reporting. An allowance or reimbursement policy, which does not necessarily have to be a written plan, must meet three requirements, to be considered an accountable plan.
To be considered an accountable plan:
- There must be a business connection to the expenditure.
- The recipient is responsible for adequate accounting within a reasonable period of time.
- Excess reimbursements or advances must be returned within a reasonable period of time.
Keep in mind if the requirements of an accountable plan are not met, the reimbursement is considered taxable.
1099 and Employees
“Can employees receive reimbursements or allowance payments via vendor check and therefore receive a form 1099 if over $600? Or should all reimbursements and allowance payments run through payroll?” The IRS discovers that taxable payments, such as commuting reimbursements, spousal travel, and money reimbursed outside of the accountable reimbursement plan, are not reported as income to the board members on a W-2 Form.
In other instances, the IRS finds these payments reported on a Form 1099-MISC as nonemployee compensation. Neither method is the correct way to report such payments. Remember that taxable payments should be reported as wages.
What is the correct taxing and reporting for these types of reimbursements and allowances?
Elected and appointed public officials are generally employees for Federal income tax withholding and employment tax purposes. When these officials receive payments for services or other purposes that are not excluded from income by tax law, or from income received by violating the accountable plan rules, the money is subject to Federal income tax withholding. In addition, the monies are subject to Social Security and Medicare taxes and are reportable on form W-2. But, if the reimbursement follows an accountable plan and the payment is a reimbursement that is not taxable to the employee under current tax law, you may reimburse the employee and there would not be any reporting on either a form W2 or form 1099.
Remember board member’s companion travel payments or reimbursements are considered income and should be reported on Form W-2.
If a travel companion expenses are paid, and the companion is not attending the meeting for a valid business reason, the employee is subject to a taxable fringe benefit.
Government Entities Reimbursing Meals
Government entities frequently reimburse for meals so let’s go over the rules regarding meals.
The general rule is meals are excludable from the employee’s wages IF they are provided:
- On the employer’s business premises, AND
- They are for the employer’s convenience.
“On the business premises of the employer”
The first test “On the business premises of the employer” means that the meals must be provided either at a place where the employee performs a significant portion of their duties, OR the premises where the employer conducts a significant portion of his or her business.
“Meals are provided for the convenience of the employer”
The second test “Meals are provided for the convenience of the employer” is met if they are provided for a substantial “noncompensatory” reason; that is, the intention is not to provide additional pay for the employee or cover personal expenses of the employee, but for business reasons, it is in the best interest of the employer to provide the meal.
Employees receiving cash allowances or reimbursements are not generally eligible for exclusion under Internal Revenue Code section 119.
The IRS Regulation section 1.119(a)(2)(ii)(a) reads: “Meals will be regarded as furnished for a substantial noncompensatory business reason of the employer when the meals are furnished to the employee during his working hours to have the employee available for emergency call during his meal period.
In order to demonstrate that the meals are furnished to the employee to have the employee available for emergency calls during the meal period, it must be shown that emergencies have actually occurred, or can reasonably be expected to occur, in the employer’s business which have resulted, or will result, in the employer calling on the employee to perform his job during his meal period”.