Unused, excess reimbursements
As a small business owner, keeping an accurate accounting of how money is being spent with regard to your company is essential. This is one of the reasons that it is important to get any unused reimbursements from your employees as quickly as possible. However, the IRS has established two safe-harbor methods related to employee substantiation and return of excess funds within a reasonable period of time.
Using the fixed-date method, the reasonable time period is met if an advance is provided no more than 30 days before incurring an expense and it is substantiated by your employee within 60 days of being paid or incurred. Also, any extra amount is actually returned within 120 days of when the expense was paid or incurred.
With the periodic statement method, you can issue a periodic statement (at least quarterly) to the employee detailing reimbursements that have been paid but yet to be substantiated. You have the right to expect the employee to substantiate the excess amount or return it to you with 120 days of receiving the statement.
The IRS has stated that Congress had not meant for the partial deduction allowance to become employee income. Therefore, assuming the accountable plan requirements are met, the full amount of reimbursements or advances are not considered employee income subject to federal income tax withholding, Social Security, Medicare or Federal Unemployment Tax Act (FUTA) purposes.
Any payments made as part of a non-accountable plan are subject to federal income tax withholding, Social Security, Medicare and FUTA taxes. Also, payroll combines the total or any reimbursements or other expense allowances paid as part of a Non-accountable plan to the employee's wages, salary or other pay. This information will be provided on Form W-2.