Is Travel Reimbursement Considered Income?

Travel reimbursements often raise questions about their taxability. The answer to this common query depends largely on how the employer structures the reimbursement process. Specific tax rules and guidelines determine whether these reimbursements are treated as non-taxable payments or as additional wages subject to income tax. This article will explain these distinctions, providing clarity on the factors that influence the tax treatment of travel reimbursements.

Understanding Accountable Plans

An accountable plan is a reimbursement arrangement established by an employer that adheres to specific Internal Revenue Service (IRS) guidelines, ensuring that reimbursements for work-related expenses are not considered taxable income to the employee. These plans are governed by Internal Revenue Code Section 62, which outlines three requirements. If a plan meets these requirements, the reimbursed amounts are excluded from the employee’s gross income and are not reported on their Form W-2.

First, the expenses must have a business connection, meaning they were incurred while the employee was performing services for the employer. Second, employees must adequately substantiate these expenses to the employer within a reasonable period. Substantiation involves providing details such as the amount, time, place, and business purpose of the expense.

Finally, the plan must require employees to return any excess reimbursement or allowance within a reasonable period. This typically applies when an employer provides an advance that exceeds the actual substantiated expenses. The IRS generally considers a “reasonable period” for substantiation to be within 60 days after the expense is paid or incurred, and for returning excess amounts, it is often within 120 days. Meeting these three criteria allows reimbursements to be treated as non-taxable, benefiting both the employee and the employer by simplifying tax reporting and reducing payroll tax obligations.

Understanding Non-Accountable Plans

In contrast to accountable plans, a non-accountable plan is any reimbursement arrangement that fails to meet one or more of the three essential requirements for an accountable plan. This includes situations where there is no business connection for the expense, employees are not required to substantiate their expenses, or they are not required to return any excess reimbursements.

When reimbursements are made under a non-accountable plan, they are considered taxable income to the employee. These amounts are treated as supplemental wages and are subject to income tax withholding, Social Security, and Medicare taxes. The reimbursed amounts must be reported as wages on the employee’s Form W-2.

Employers also face increased payroll tax liabilities when operating under a non-accountable plan. The lack of proper substantiation and the ability for employees to retain excess funds mean that these payments are viewed by the IRS as compensation rather than a mere repayment of business costs. Therefore, both employers and employees incur additional tax burdens that could otherwise be avoided with an accountable plan.

Common Reimbursable Travel Expenses

Many types of expenses are commonly reimbursed for business travel, and their tax treatment hinges on adherence to accountable plan rules. Transportation costs, such as airfare, train tickets, bus fares, or car rentals, are frequent reimbursement categories. If an employee uses a personal vehicle, mileage reimbursement, along with business-related tolls and parking fees, are also common.

Lodging expenses, including hotel stays or temporary housing, are another primary category of travel reimbursement. Meals and incidental expenses (M&IE) are also typically covered, either through actual expense reimbursement or via per diem allowances. Per diem rates provide a simplified method for substantiating meal and lodging expenses, still requiring a business connection and substantiation of travel days.

Other necessary business expenses incurred during travel, such as business calls, internet access, baggage fees, and tips, are also generally reimbursable. For any of these expenses to be non-taxable, they must be ordinary and necessary for the employer’s business and properly substantiated under an accountable plan. This ensures that the reimbursements are solely for legitimate business purposes and not for personal benefit.

Essential Record Keeping for Reimbursements

Maintaining meticulous records is fundamental for ensuring that travel reimbursements qualify under an accountable plan and remain non-taxable. For each expense, employees must document the amount, the time and place of the expense, and its specific business purpose.

Original receipts or other verifiable documentation are generally required for most expenses. While the IRS allows for some exceptions, such as not always requiring a receipt for expenses under $75 (excluding lodging), employers often require receipts for all expenses regardless of amount to ensure compliance. For personal vehicle use, a mileage log detailing the date, starting and ending mileage, destination, and business purpose of each trip is essential.

All documentation must be submitted to the employer within a reasonable period, typically within 60 days after the expense is paid or incurred. Adhering to these record-keeping requirements is critical for employees to demonstrate the legitimacy of their business expenses. Proper documentation protects both the employee from potential tax liabilities and the employer from non-compliance issues during audits.