What Every Payroll Manager Should Know About Travel Expense Reimbursements
When must you report expense reimbursements as taxable income? How do the requirements differ for daily travel vs. overnight travel? Read on to find out:
Requirements for nontaxable overnight travel expense reimbursements
Reimbursements for overnight business travel can be excluded only if the expenses are incurred while the employee is temporarily away from home and on business for your company. Specifically:
- The employee's duties require him or her to be away from the general area of home substantially longer than an ordinary day's work, and...
- The employee needs to sleep or rest to meet the demands of work while away from home.
Generally, a temporary assignment in a single location is one that is realistically expected to last for one year or less. In some cases, you may believe that an assignment will qualify as temporary, but later discover that the assignment will last longer than a year. When that happens, reimbursements for expenses incurred after it became clear that the assignment would last more than a year become fully taxable for income and employment tax reporting and withholding.
Reimburse employees for substantiated overnight expenses...
Employee expense reimbursements are generally taxfree and do not require reporting on the employee's W-2 if the payments are made under an accountable plan. Toqualify, the plan requires:
- A business connection.
- Substantiation, including the date, amount, business purpose, and place the expenses were incurred. Employees must provide receipts for all expenses of $75 or more and all lodging receipts, regardless of the amount. (Your company can set a lower limit, if it prefers.)
- Return of any money advanced for unsubstantiated amounts within a reasonable time after the travel takes place.
...or pay a fixed per diem rate
Alternatively, you can pay for travel expenses using a per diem plan. Per diems require only that your employee substantiate the time, place, and business purpose of these expenses. The allowance you set will be deemed substantiated as long as it does not exceed IRS-established federal per diem rates for two categories:
- Lodging — excluding lodging taxes which can be reimbursed as a miscellaneous expense.
- Meals and Incidental Expenses (M&IE) — fees and tips, transportation between lodging or business and restaurants, postage for filing expense reports, and paying employer-provided credit card bills. The federal per diem rates for these two categories are listed in IRS Publication 1542. To download it, visit www.irs.gov and search for “Publication 1542.”
Two methods for determining which per diem rate to apply
There are two approved methods for using the rates in IRS Publication 1542:
1. High/low substantiation: Under this method, close to 40 localities in Publication 1542 qualify for a “high” 2007 per diem rate of $246. Any locality not listed as “high” is automatically considered “low cost” and qualifies for a per diem rate of $148.
2. Locality of travel: Publication 1542 also lists per diem rates for hundreds of specific localities within the United States. With this method, you use the per diem rate for the individual location. For travel in 2007 to any location not listed, apply the standard rate of $99 ($60 for lodging, $39 for M&IE).
You can use high/low per diem rates for one employee and locality of travel for another. But the two rates cannot be mixed when reimbursing the same employee within a given year.
This Article was based on the American Payroll Association's 76-page booklet titled, Your Paycheck® for more information go to http://www.adp.com