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Expense Reimbursements

  1. Employers may choose to deduct as business expenses any reimbursements to employees for business-related expenses; that would not apply to reimbursements for personal, non-business expenses, such as the costs of the employee's personal entertainment while on the road.

  2. General rule - IRS Treas. Reg. 1.62-2(c): expense reimbursements, both for business and personal expenses, are taxable as part of gross income for employees.

  3. Exception: if reimbursements are made pursuant to an "accountable plan", the payments are not included in gross income (see IRS Publ. 15 (2021)) and are not considered "wages" for purposes of unemployment compensation or the Texas Payday Law.

  4. Accountable plan criteria (IRS rule 1.62-2(c)(5)):

    1. an expense advance is made within 30 days of when an expense is paid or incurred;

    2. reimbursements can only be made for business expenses incurred by the employee in connection with the performance of the employee's duties;

    3. the plan must require employees to substantiate their expenses within a reasonable period of time (within 60 days after the expense is incurred); and

    4. the plan must require employees to repay any reimbursements which exceed substantiated expenses within a reasonable period of time (within 120 days after expense is incurred).

  5. "Non-accountable plan" - reimbursements that do not meet those criteria.

  6. Employers do not have to reimburse an employee's out-of-pocket business-related expenses; however, the employee must be allowed to deduct unreimbursed business expenses as itemized deductions.

  7. Most employers reimburse such expenses pursuant to a written policy - see below.

  8. Careful with minimum wage issues!

    1. Do not force employees to pay business costs if it takes them below minimum wage (see "Deductions for Other Costs to the Employer" in the article "The Texas Payday Law - Basic Issues" for details)

    2. Reimbursements for actual business expenses (i.e., made under an accountable plan) do not count toward the regular rate for overtime calculation purposes, while reimbursements in excess of the actual amounts (those not made in accordance with an accountable plan) would be considered extra pay that would count toward the regular rate of pay - see section 778.217 of DOL's wage and hour regulations for details.

    3. Other than what an employer must reimburse to the employee in order to keep the employee's pay at least at minimum wage, expense reimbursements do not constitute "wages" and may not be the subject of a Texas Payday Law wage claim (see 40 T.A.C. §825.25(d)).

  9. Expense reimbursement policy considerations:

    1. Set a clear written policy stating what will be reimbursed, under what conditions, and when, and have employees sign it; be as specific as possible.

    2. Same thing for expenses that will not be reimbursed - as noted above, be careful with the issue of minimum wage.

    3. Larger expenses should require authorization.

    4. Require receipts.

    5. Provide for auditing by someone other than the employee.

    6. Provide a corrective action procedure for handling violations of the policy.

    7. Under the law of employment at will, the policy can be changed.

  10. Meals and travel:

    1. Usual case: reimbursement is based upon actual costs and receipts, but some companies pay a standard per diem (the federal meal/incidental expense rate is set by IRS and meets the criteria for an accountable plan).

    2. FLSA issue: if the company pays a per diem that is larger than reasonably necessary, the excess must be included in the employee's "regular rate" as noted above (and also must be considered part of taxable wages).

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