Reimbursing Employee Business Expenses

The reimbursement of employee travel and other out-of-pocket business expenses is most efficiently handled when the employer has established an “accountable” expense reimbursement plan.

Under Reg. 1.62-2(c)(4), an advance or reimbursement made to an employee under an “accountable” plan is deductible by the employer and is not subject to FICA and income tax withholding.  In general, an advance or reimbursement is treated as made under an accountable plan if (1) the employee receives the advance for a deductible business expense that he paid or incurred while performing services as an employee, (2) the employee must adequately account to his employer for the expense within a reasonable period of time, and (3) the employee must return any excess reimbursement or allowance within a reasonable period of time.

Advances or reimbursements to employees which are not made pursuant to these guidelines are fully taxable to the employee and subject to FICA and income tax withholding, thus forcing the employee to deduct the business expenses on his personal tax return, as a miscellaneous itemized deduction, subject to the 2% floor.  Not the most efficient way to go.