The compliance risks of mishandling employee expense reimbursements have spiked in recent years. And the IRS is in the middle of a wide-ranging audit crackdown on employment-tax issues.
Have you reviewed your expense reimbursement policy
recently to determine if it adheres to the Internal Revenue
Service (IRS) guidelines? Now is a great time to review your policy and determine whether it is compliant.
Let’s take a look at what the IRS guidelines entail. Most
expense reimbursement plans are structured as
accountable plans. An accountable plan exists when an
employee is reimbursed for expenses or receives an
allowance to cover expenses only when the following
conditions are met:
- There must be a business reason for the expense.
The expense must be in connection with the
performance of services as an employee.
- The expense must be substantiated or deemed
substantiated. There must be receipts and
invoices that document the nature and amount of
the expenditure(s). Deemed substantiation
includes using mileage allowance rather than
actual expenses for operating a vehicle.
- Employees must return to the employer amounts
in excess of substantiated expenses within a
reasonable time. The return should be made
either from a periodic (within 60 days of travel)
statement or at fixed date (quarterly if on perpetual
8 questions about employee expense reimbursements-
1. When it comes to meal expenses, what is the IRS’ dollar minimum that requires substantiation from an employee?
- The IRS requires substantiation at $75—but many churches lower their own bar to about $25.
- If you are not using a per diem allowance, the IRS requires
the Five “Ws” to be documented for proper substantiation
for actual meal receipts:
• Who was there?
• Why the meal was considered official business?
• Where did the meal occur?
• What was the cost of the meal?
• When did the meal occur?
2. If an employee uses a personal credit card for a business purchase, is there a time limit for reimbursement?
- Most churches stick with a flat-out 60-day rule: Expenses such as these will be reimbursed up to 60 days from the time the charge was incurred or paid for by the employee, but not beyond that.
3. What is considered adequate substantiation for mileage reimbursement?
- Technically, the employee has to maintain a log or record of some type; the format should be mutually agreed upon in advance. To reimburse individual trips, ask for a printout from something like Google Maps noting the miles traveled.
4. An employee has a credit card bill showing a transaction; does he still have to turn in a formal expense report?
- Absolutely—there needs to be a ministry reason noted for the expense, which a credit card bill will rarely make clear.
5. We bought a $10 gift card for an employee as a way of expressing appreciation for pitching in during VBS. Does that low dollar amount mean we can forget about it?
- A gift card to an employee is considered a cash or cash-equivalent reward and is subject to tax regardless of the dollar amount. There’s no de minimis qualification in this area as far as the IRS is concerned.
6. We’re paying for an employee’s temporary housing while he finds permanent accommodations in our community. How do we handle this tax-wise?
- Temporary housing is always taxable.
7. If an employee’s spouse travels with her but no extra expenses are incurred because of it, are there issues of extra compensation? In our example, the hotel rate that the employee booked was the same for one person as for two.
- No, it’s not considered compensation as long as no additional expenses were incurred at all. For example, an employee who rents a car may carry someone along, or a single-bed hotel room might be shared. If an additional plane seat is purchased, though, or a double room needs to be reserved, then the added expense becomes compensation.
8. We have a modest flat rate or gas allowance that we use when we reimburse staff for travel from one location to another if done for church purposes. Is there a problem with it being a flat rate or gas allowance and not calculated by specific mileage case by case?
- Your flat rate or gas allowance better have some basis in reality compared to the standard IRS mileage rate. If you’re paying more than the standard rate, the IRS will want to know why.
Do you have more questions?
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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