February 17, 2017
By Salvatore J. Armao, CPA/PFS, CFP, CFE, CGMA
This is the second in a series of articles on proper tax reporting for labor unions. It is imperative that labor unions engage in proper tax reporting, especially as tax time approaches. This article focuses on Reimbursed Employee Expenses.
Reimbursed Employee Expenses
There are two common methods of reimbursing employees for business expenses in connection with their employment as follows:
a) An accountable plan
b) An unaccountable plan
When an employee is required to report, and does report, business expenses for travel, transportation, lodging, entertainment and similar purposes, paid or incurred by him solely for the benefit of his employer, reimbursements or advances paid to him are excluded from an employee’s income, are not required to be reported on the employee’s Form W-2, and are exempt from income and employment tax withholding.
An Accountable Plan must meet the following three requirements:
1) Business Connection – business expenses are paid or incurred in performance of services as an employee.
2) Substantiation – employee must submit documentation to substantiate expenses to the employer to enable the employer to identify the specific nature of each expense and to conclude that it is an employee business expense.
3) Return of Reimbursements Exceeding Expenses – requires the employee to return the amount of a reimbursement or advance that exceeds expenses paid or incurred by him.
Under the Accountable Plan, the employee must submit an adequate accounting to the employer. This may be in the form of an account book, diary, log or similar record in which the expense is recorded at the time it is made along with documentary evidence such as paid bills or receipts.
An unaccountable plan does not require any reporting by the employee to the employer. All advances, allowances and reimbursements under an accountable plan must be included in the employee’s gross income, are reported on his W-2 Form and are subject to income and employment tax withholding.
However, the employee may claim itemized deductions for expenses attributable to amount received under an unaccountable plan by filing Form 2106 with his personal tax return.