Employers who choose to reimburse their employees for business expenses must meet the employer reimbursement rules. In 2021, the rules for reimbursing employees for their business expenses is the same as any other year.
First and foremost, an employer must have an accountable plan to track the reimbursements. Also, having a reimbursement policy is a good start to determine what can be reimbursed. Since the Internal Revenue Service has guidelines for many type of business expenses, you can figure out what can be reimbursed.
For the most part, employers choose to reimburse the following.
- Mileage expenses
- Per diem
Although the above are very common, anything that is related to business can be reimbursed by employers. As long as the amount reimbursed is how much the employee spent out of his or her pocket, the reimbursement won’t be taxable.
For example, employers who reimburse their employees for driving their personal vehicles for business can use the IRS standard mileage to see the amount they should reimburse. If the mileage reimbursement is more than the mileage rate based on the number of miles driven for business, the excess amount will be taxable.
In addition to the mileage rates, if the employer reimbursed amount is more than the actual expense, the excess amount must be returned back to the employer in a reasonable period of time.
Under the IRS guidelines, a reasonable period is 120 days. So the employee must return the excess amount if any within 120 days after given the reimbursement. However, this is a little bit different with per diem. If you’ve given your employee per diem based on the per diem rates, the employee can choose not to spend that money and keep it.
In other types of reimbursements, the reasonable period of time starts the day the employer reimburses the employee, not when the expenses occur. If the excess amount isn’t returned by the employee within 120 days, the excess amount will be taxable and must be reported as income on Form W-2, Wage and Tax Statement.