Every nonprofit eventually asks the question: What is the best way to deal with employee expense reimbursements? The importance of this question is underscored by IRS regulations requiring nonprofits to comply with tax exempt rules—including those involving how employee expense reimbursements are handled.
Undoubtedly, your organization will run into situations where your employees or volunteers must spend their own money on travel, food, office supplies, and other business expenses. To that end, it’s important that your organization follows an employee expense reimbursement model that adheres to IRS guidelines known as an accountable plan.
What is an Accountable Plan?
An accountable plan allows you to reimburse your employees or volunteers for business-related expenses without having those expenses included in your employees’ compensation, thus incurring taxable income for your employees and payroll tax for your organization. These reimbursements are not subject to withholding taxes or W-2 reporting as long as they are relevant to the operations of your nonprofit, and they are properly accounted for. Moreover, reimbursements paid in excess of actual costs are required to be returned to the nonprofit within a timeframe determined by IRS rules—generally within 120 days of disbursement.
For expenses to qualify under an accountable plan, they must meet the following criteria:
- The expenses were incurred within the course of employment
- Expenses that combine personal and business items must be accounted for properly by dividing the appropriate costs between the employer and the employee
Accountable plans usually involve third-party confirmation to demonstrate that employees’ expenses were related to the business. Receipts are commonly used for this purpose as they help to prove that their reimbursement requests are appropriate.
Do’s and Don’ts of Employee Expense Reimbursement
To build an even greater understanding of accountable plans, here are some do’s and don’ts that will help your nonprofit adhere to IRS guidelines.
Document your IRS accountable plan in written format. Include acceptable types of expenses for reimbursement in your written document to avoid any uncertainty about what qualifies. While the IRS doesn’t require nonprofits to document their accountable plans, your organization still must carefully adhere to all the IRS regulations of these plans. For this reason, it’s best to document your accountable plan in written form and make it available to all employees and volunteers.
Stay current on acceptable reimbursement rates. IRS reimbursement rules regarding rates can vary from year to year. Therefore, it’s vital to stay current on IRS-issued rates for reimbursement. For example, in the beginning of 2022 nonprofit organizations could reimburse employees 58.5 cents per mile while volunteers could be reimbursed 14 cents per mile.
Reimburse personal expenses under an accountable plan. Personal expenses are not allowed to be reimbursed under accountable plans. Qualified reimbursements are exclusively for expenses that carry out the operation of the organization. Personal expenses that are reimbursed under accountable plans can result in IRS penalties.
Delay accounting for the expense. Expenses qualifying for reimbursement are required to be accounted for within 60 days of the costs incurred. For this reason, employees and volunteers should submit their expenses promptly.
Discard receipts. For an expense to qualify, employees and volunteers must provide itemized receipts that show the relevant business purchase, the date, the vendor, and the cost. Reimbursements may not be greater than the amount of the qualifying business expenses on the receipts. Moreover, if an employee or volunteer is reimbursed in excess of qualifying expenses, they must return the excess within 120 days of the date on the receipt. For these reasons, it’s imperative that receipts are not discarded.
Goldin Group CPAs Leverages Next-Generation Technologies in Employees Expense Reimbursement
At Goldin Group, our tax preparation services leverage technology to implement employee expense reimbursement best practices to ensure compliance, streamlined expense reimbursement processes, and accurate record keeping. Reach out to the nonprofit experts at Goldin Group CPAs today by contacting Ariel Goldin, CPA, Director of Client Relations at email@example.com.