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#Reimbursement of contractor expenses how to
#Reimbursement of contractor expenses professional

This could be the case, for example, where an employer pays an employee the same gross amount regardless of the amount of expenses the employee incurs. In addition, there are IRS rules designed to prevent an employer from reducing employees wages in a manner inconsistent with an accountable plan. This would likely mean a reduction in the employees wages, and it may not be easy to determine what this should be because of the variability in expenses and employee situations.

#Reimbursement of contractor expenses how to

Obviously, there is a financial cost involved for a company to begin reimbursing employee expenses where that has not been the practice.Įmployers will need to consider how to incorporate reimbursement arrangements into an overall compensation policy, as a matter of being both fair and competitive. This may be done for various non-tax reasons such as administrative simplicity, allowing the employee more autonomy in their work, etc.

Some employers have arrangements whereby their employees are expected to pay for certain business related expenses out of their income, rather than be reimbursed. Restructuring employee compensation when changing to a reimbursement arrangement

#Reimbursement of contractor expenses professional

Dues and subscriptions, professional licenses.

Meals and entertainment (including per diem payments).

Travel and lodging for business purposes.

Mileage for business use of personal automobile.

Examples of expenses that may be made in an accountable plan: If a reimbursement arrangement does not meet these conditions, reimbursements will be considered as paid from a nonaccountable plan and should be included in taxable wages. The IRS provides a safe harbor for what would be a reasonable time: 60 days for accounting and substantiation 120 days for returning excess amounts.

Any excess reimbursements or allowances must be returned within a reasonable time.

There must be an accounting with substantiation date, place, amount, business purpose to the employer for these expenses within a reasonable time period and.

The employee must have paid or incurred expenses that are deductible while performing services as an employee (ordinary and necessary business expenses),.

To be an accountable plan, the employers reimbursement or allowance arrangement must include the following: This is very inefficient from a tax standpoint, since if the employer made a reimbursement from an employee reimbursement arrangement called an accountable plan, the reimbursement would not be taxable to the employee and the employer would still get a tax deduction (subject to certain limits on meals & entertainment deductions).

Under TCJA, those expenses are no longer deductible so the employee would no longer have an offset against the taxable reimbursements.

This might also serve as a means to provide more after-tax income to the employee and be more competitive in the marketplace.īefore TCJA, an employee who incurred unreimbursed business expenses (or received taxable allowances or reimbursements for those expenses) could deduct the expenses on their tax return as an itemized deduction. By taking the steps to shift to a reimbursement arrangement that would qualify as an accountable plan, the employer may be able to provide a much more tax efficient way to handle these expenses. An employer may currently be using what is called a nonaccountable plan. As a result of changes in the treatment of employee business expenses in the Tax Cuts and Jobs Act of 2017 (TCJA), some employers may wish to revisit their policies on reimbursement to employees for those expenses.