Today TaxMama® hears from Josh in the TaxQuips Forum with a complex question about reimbursement plans. So, TaxMama wants to explain the overall concept.
When you’re an employee, it’s important to understand the difference between the two ways your company can reimburse you for your business expenses – and the different tax costs to you. There are accountable plans and nonaccountable plans.
1) Accountable plans – You turn in all receipts to your employer. You get reimbursed for all your expenses. If you get an advance, you return the difference if your costs are lower. Tax impact? You break even. You do not pay any extra taxes. You do not need to include your business expenses on your tax return.
2) Nonaccountable plan – You get money from your employer, perhaps as a monthly allowance; or perhaps, per trip or event. You use the money cover your expenses and keep any excess. Tax Impact? The full amount of the allowance or advance is included in your wages.
o You pay 7.65% FICA/Medicare and all taxes on those funds, as if they were wages.
o To recoup the income taxes, you must use itemized deductions on your tax return. Often, you cannot, because you don’t have enough other itemized deductions.
o AND even when you do, your expenses are reduced by 2% of your adjusted gross income.
o When it comes to meals and entertainment, you lose 50% of the deduction.
Tomorrow, I will explain more about the company’s written policy and how it impacts a tax audit.
And remember, you can find answers to all kinds of questions about employee business expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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