If a former employee has not paid back an outstanding travel advance received before he or she separated from employment, should the employer include the advance in the former employee's taxable income?
Author: Alice Gilman
Yes. If an employer's reasonable attempts to obtain repayment have been unsuccessful, it should add the outstanding amount to the employee's income for the year in which the advance was made. Under the Internal Revenue Code, unsubstantiated business advances exceeding $75 are generally considered taxable compensation to the employee. Since the employee no longer has actual income from which the employer can withhold the employee portion of FICA taxes, the employer should gross-up the FICA taxes due on the amount of the advance. The employee is responsible for paying the federal and state income taxes due on the additional income received.