Employee Reimbursement 101 – Minimizing taxable expenses and staying compliant with laws and regulations.

Keeping clients happy, vendors paid, and operations running smoothly is a tall task for any business — especially smaller organizations. For convenience’s’ sake, many employers find that allowing employees to pay certain expenses from their own pockets and reimbursing them later is a virtual necessity. However, business owners should be aware that this common practice does entail a bit of responsibility.

Broadly speaking, there are three different ways of managing employee reimbursements — each with its own unique set of benefits and disadvantages. These reimbursement strategies are known as accountable, nonaccountable, and per diem plans. Read on to learn more details of each:

Accountable Reimbursement is the most common way allowing employees to cover costs such as materials, gas, and other simple expenses. Accountable reimbursements must be A) payment for an expense incurred on the job, B) substantiated with a receipt or other paperwork, and C) paid for by the employer within a reasonable amount of time, with the employee returning any excessive payments within a reasonable amount of time as well.

Per Diem Reimbursement is most common for travel expenses, as it applies specifically to lodging, meals, and incidental expenses. These funds are given as an allowance to the employee — and any unused funds are usually kept by the worker. Although collective expense reports is still a necessity, per diem does offer a slightly simpler process ideal for financing a business trip without needing to worry about individually approving every single dime that your employee spends. Visit the official IRS website to learn more about Per Diem rules and regulations.

Non-Accountable Reimbursement do not require expense reports, and there is no time limit on when you must reimburse your employees nor when they must repay any excess reimbursement. However, all this simplicity comes at a price — these payments are taxable as part of your payroll and must be included on the employees W2.

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