The Tax Implications of Travel Reimbursements
Employers sometimes reimburse employees for travel related to the business or the employee's job. Depending on whether the plan offered is accountable or nonaccountable, and how long the trip, the employer or employee may be taxed on the reimbursement funds.
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Amounts paid under accountable plans are not wages and so are not subject to the employee’s withholding for social security, Medicare or Federal Unemployment Taxes (FUTA). To qualify as an accountable plan, the reimbursement or allowance arrangement must meet all three of the following criteria:
- There must be a business connection to the expenditure. This means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on their 1040 income tax return. Deductible expenses include the costs of:
- Air, train, bus or car travel between the employee’s home and business destination;
- Use of the employee’s vehicle at the business destination;
- Taxi, or similar fares for transportation, between the airport or train station and the hotel or work location, between the hotel and work location, between client locations, or between business locations.
- Meals and lodging; and
- Tips paid for services related to any of these expenses.
- There must be “adequate” accounting by the recipient, within a reasonable period of time. This means that employees must verify the date, time, place, amount and the business purpose of the expenses. Receipts are required unless the reimbursement is made under a per diem plan.
- Excess reimbursements or advances, must be returned within a reasonable period of time. Reasonable depends upon facts and circumstances.
Amounts paid under nonaccountable plans are taxable to employees and subject to all employment taxes and withholding. Reimbursements are considered paid under a nonaccountable plan if:
- The employee is not required to, or does not substantiate with receipts or other documentation, the expenses being reimbursed, in a timely fashion.
- An amount is advanced to the employee for business expenses and the employee is not required, nor do they return any of the funds advanced that are not used for business expenses.
Trip or Relocation?
Obviously, spending a day or two at a client location or even a week at a conference, is not the same as relocating. Some temporary assignments, however, can last weeks or months. Only if the assignment is expected to last for a year or more, does it become, for tax purposes at least, relocation. Even if the assignment was not expected to last more than a year initially, it became an indefinite assignment or relocation, the moment it was realized that the employee would be at the location for a year or more. Further, if the employee is traveling to the business destination every week and home on weekends, such an arrangement is considered to be travel, not relocation, for tax purposes.
Some employees, particularly executives and company owners, may have a second home in a location where they conduct business. Expenses related to renting a home are, arguably, legitimate travel-related lodging expenses as long as the home is rented for use during the assignment and not for personal use that happens to coincide with the assignment. If the home is owned by the employee, however, it is a personal expense, not a travel expense and as such, is taxable for the employee and probably should not be reimbursed by the employer.
Technology has made business travel less of a necessity for many businesses. It is still nice to meet, face-to-face, with clients and even employees in different locations from time to time, so it is unlikely that business travel will be going away any time soon. Until it does, both employers and employees would be wise to keep an eye of the tax implications of traveling for business.