Some business expense reimbursements are considered taxable income while others are tax-exempt. It all depends on your employer's type of reimbursement arrangement. The IRS allows two types of business expense reimbursement arrangements: the accountable plan and the nonaccountable plan.
A business expense reimbursement will count as taxable income if the employer uses a nonaccountable plan.
Your business expense reimbursements are not considered wages (therefore, not taxable income) if your employer uses an accountable plan. This type of plan requires you to meet three criteria:
- You must have incurred an expense while acting as an employee by performing a service for the company, and the reimbursement for that expense must not be an amount that would otherwise be paid to you as wages.
- You must substantiate the expense within a reasonable period of time. The IRS considers a "reasonable period of time" to be 60 days after you incur the expense.
- You must return any amount that exceeds the actual expense within a reasonable period of time. The IRS considers a "reasonable period of time" to be 120 days after the expense was incurred or paid.
If your employer uses an accountable plan, and if you do not follow the plan guidelines, your expense reimbursement becomes taxable income. For example, if you fail to return a business expense reimbursement overage within 120 days, the overage becomes taxable income.
Business expense reimbursements are considered supplemental wages (therefore, taxable income) if your employer uses a nonaccountable plan. This type of plan carries these parameters:
- You are not required to substantiate your expenses in a timely manner by providing receipts or other documentation.
- You are not required to return in a timely manner any overages of business expenses that your employer paid you.
- Your employer compensated you for an amount that was not truly a business expense.
- You receive a business expense reimbursement that would normally have been included as your regular wages.
Per Diem and Allowances
These types of employee reimbursements are for fixed expenses, such as mileage, meals and lodging. The federal allowable mileage rate for 2018 is 54.5 cents per mile, and the U.S. General Services Administration establishes other federal per diem rates, such as lodging and meals. These allowances vary from state to state, but you can use an online calculator to determine specific amounts. Visit GSA.gov, enter "per diem rates" into the search field at the top right and follow the prompts. You must provide your employer with documentation that supports the reason for your business travel and the actual mileage you incur on a business trip. If your per diem or allowances exceeds your actual expenses, the overage is considered wages (therefore, taxable income).
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.