Overview: With the frequency of business travel today, employers must keep up with ever-changing regulations governing reimbursement of employee business travel expenses to avoid subjecting employees to otherwise unnecessary payroll taxes and having the employer's entire reimbursement plan being deemed a taxable nonaccountable plan.
Employees may generally be reimbursed, tax free, under Internal Revenue Service (IRS) regulations for the reasonable business travel expenses they incur, such as meals and lodging. However, under the IRS's accountable plan rules, if employees do not substantiate their expenses within a reasonable time period, the expenses do not have a business connection, and employees do not return excess reimbursements within a reasonable period of time, even potentially tax-free reimbursements become subject to withholding for federal income taxes and employment taxes (i.e., Social Security and Medicare (FICA) taxes, and federal unemployment (FUTA) taxes).
Final IRS regulations:
IRS revenue ruling illustrates the accountable plan rules: The IRS released a revenue ruling illustrating various types of plans that will be deemed nonaccountable plans, and therefore fully taxable, for failure to meet the business connection requirement of the accountable plan rules - one involved an employer's mileage reimbursement plan, and another involved a per diem plan, among others.
Author: Rena Pirsos, JD, Legal Editor
The Taxation of Employee Compensation section of the Employment Law Manual has been updated to include a number of important legislative and regulatory changes that occurred in late 2015 and early 2016.
The Taxation of Employee Compensation section of the Employment Law Manual has been updated to reflect several fourth-quarter 2015 developments.
The IRS has issued Notice 2015-63 announcing the annual list of "optional high-low" federal per diem rates, effective for travel undertaken on or after October 1, 2015 .
The General Services Administration (GSA) has announced the per diem rates that apply to the lower 48 Continental United States (CONUS) for the federal government's fiscal year (FY) 2016, which begins October 1, 2015. Any employer may use these rates to reimburse an employee who travels away from home overnight, in lieu of reimbursing his or her actual expenses.
California employers seeking to provide employees with an overview of its business travel and reimbursement policy and to help maintain reasonable limits on business expenses should consider including this model poilcy statement in their handbook.
In Notice 2015-2, the IRS has provided much anticipated special administrative procedures applicable to fourth-quarter 2014 Form 941, Employer's Quarterly Tax Return, and 2014 Form W-2, Wage and Tax Statement, for employers that allowed employees to defer more than $130 a month for mass transit benefits in 2014.
The IRS has adopted as final regulations that clarify proposed regulations issued in 2012 allowing employers to reimburse employees who are not away from home overnight for their local lodging expenses as a tax-free working condition fringe benefit (rather than a taxable personal expense) under the Internal Revenue Code.
The IRS has issued Notice 2014-57 announcing the 2014-2015 list of "optional high-low" federal per diem rates that employers may choose to use instead of the standard federal rates issued by the General Services Administration to reimburse expenses incurred by employees who travel on business to locations within the Continental US. The IRS also has issued the special federal meals and incidental expenses per diem rates that apply to the transportation industry and the incidental-expenses-only rate.
Employers seeking to advise employees of when they will provide reimbursement for business travel and help employees maintain reasonable limits on business expenses should consider including this model policy statement in their handbook.
Payroll tax laws affecting employee business travel expenses.