What Is the IRS 60-Day Rule for Expense Reimbursement?

The Internal Revenue Service (IRS) provides specific timelines for expense reimbursements to ensure they are treated as non-taxable payments rather than wages. Failure to comply with these rules can lead to tax consequences for the employee. The framework governing this process is an accountable plan, which sets the standards for how business expenses must be reported and paid.

Accountable Plans and Tax-Free Reimbursements

For an expense reimbursement to be excluded from an employee’s gross income, it must be provided under what the IRS defines as an “accountable plan.” This type of plan must satisfy three requirements. If a reimbursement arrangement fails to meet any of these conditions, it is classified as a non-accountable plan, and all payments are considered taxable income.

The first requirement is that the expenses must have a business connection. This means the cost was incurred by the employee while performing their job duties. Examples include costs for travel, meals, supplies, or use of a personal vehicle for business purposes.

A second condition is that the employee must adequately account for these expenses to the employer within a reasonable period. This involves providing documentation, such as receipts or logs, that substantiate the amount, time, place, and business purpose of the expense.

The final requirement is that the employee must return any excess reimbursement or allowance to the employer within a reasonable period. This situation arises if an employee receives a cash advance that ultimately exceeds the actual, substantiated costs.

Applying the 60-Day Rule for Substantiation

The IRS provides “safe harbor” methods that satisfy the requirement for timely substantiation, with the 60-day rule being a widely used standard. This rule establishes that if an employee provides documentation for an expense within 60 days after it was paid or incurred, the substantiation is considered made within a reasonable period.

For instance, if an employee pays for a business-related hotel stay on March 15, they have until May 14 to submit the receipt and expense report. For travel-related expenses, the date the expense is incurred is often considered the completion date of the trip.

Returning Excess Reimbursements

The third part of an accountable plan is the timely return of any funds advanced to an employee that exceed their substantiated business expenses. If an employee’s actual expenses are less than the amount of a cash advance, the leftover money must be returned to the employer.

The IRS provides a separate safe harbor timeline for this action. An employee must return any excess reimbursement within 120 days after the expense was paid or incurred. This 120-day period for returning funds is distinct from the 60-day window for substantiating the expenses.

For example, an employee receives a $500 travel advance. After the trip, they substantiate $450 in expenses within the 60-day window. The employee then has 120 days from when the expenses were incurred to return the remaining $50 to the employer.

Consequences of Non-Compliance

When an employer’s reimbursement arrangement fails to meet any of the three core requirements, it is classified as a “non-accountable plan.” Under a non-accountable plan, all reimbursements are treated as wages.

This means the entire amount paid to the employee for expenses is added to their regular pay and reported as wages in Box 1 of the employee’s Form W-2. These reimbursements become subject to federal income tax withholding, as well as Social Security and Medicare (FICA) taxes. The employer is responsible for withholding these taxes.

Failing to meet the deadlines can convert an entire reimbursement into taxable income, not just the portion that was late. For example, if an employee submits a valid business expense 61 days after it was incurred, the employer must treat that reimbursement as wages under a non-accountable plan.