['Compensation']
['Compensation', 'Taxes, Employment', 'Payroll']
06/05/2024
Copyright 2024 J. J. Keller & Associate, Inc. For re-use options please contact copyright@jjkeller.com or call 800-558-5011.
...
Many employers provide fringe benefits to employees such as reimbursement for travel expenses, but may not realize that these benefits could be taxable income to employees. Taxable benefits can include things like an employee's personal use of a company vehicle, allowances for business expenses, cash or cash equivalent such as gift cards, and in some cases, even meals eaten while traveling.
Employers are not required (in most states) to reimburse employees for business expenses. If a company chooses not to do so, the employee can often claim a tax credit for the expenses (essentially, it reduces the individual's taxable income). Employers may also choose to pay for some expenses, such as lodging and meals, but not for other expenses such as personal vehicle mileage. Again, employees can take a tax credit for eligible amounts that were not reimbursed.
This is important to know because, as a general rule, if an individual would not be able to claim a particular expense for a personal income tax deduction, then an employer's practice of paying for that expense is likely to create taxable income to the employee.
Using a company vehicle
When employees travel for business, they can be allowed to use a company vehicle or they can be reimbursed for the cost of using a personal vehicle. Employees can also usually be reimbursed for meals and incidental expenses. These costs must be substantiated or accounted for, typically either using receipts or using the Internal Revenue Service (IRS) rates for mileage or per diems, which the IRS deems to substantiate the actual cost to the employee. Then, the reimbursement does not have to be counted as taxable income.
However, if the employee uses a company vehicle for personal use, the value of that use may become taxable income to the employee. This may occur if, for example, the employee uses a company vehicle for commuting more than once per month, and even that occasional use should be incidental. Other personal use, such as going to the grocery store, would become taxable income as well. The company can usually calculate the income value using the IRS mileage rate. Alternatively, the employee may reimburse the company for the personal miles on the company car using the IRS mileage rate.
The IRS does allow an exception for occasional use of a business vehicle, if the vehicle is not otherwise suitable for personal use. Such as vehicle is called a “qualified nonpersonal use vehicle.” According to the IRS, a qualified nonpersonal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal use vehicles generally include all of the following vehicles.
- Clearly marked, through painted insignia or words, police, fire, and public safety vehicles.
- Unmarked vehicles used by law enforcement officers if the use is officially authorized.
- An ambulance or hearse used for its specific purpose.
- Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
- Delivery trucks with seating for the driver only, or the driver plus a folding jump seat.
- A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
- School buses.
- Tractors and other special-purpose farm vehicles.
- Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks.
Expense allowances
Some employers provide allowances for business expenses, perhaps helping employees purchase tools or clothing needed for the job, or giving a flat amount for travel expenses. If the expenses are not tracked and accounted, however, the full amount provided becomes taxable income to the employee.
To avoid this, the employee must report the actual expenditures. Also, if the employee received more funds than needed, he or she must return the excess to the employer. Otherwise, that excess would still be taxable income.
Employers should note that allowances for clothing have special requirements. The clothing must be required for the job (such as a uniform or protective gear) and should not be adaptable for use as street wear. Merely having the company name or logo on a work shirt is not sufficient to meet this exclusion.
Gifts and incentives
Gifts in the form of cash or cash equivalent are also taxable income, regardless of the amount. Despite a common misconception that amounts under $10 or under $25 can be ignored, there is no minimum cash value for exclusion. Any cash or equivalent (e.g., gift card) must be counted as taxable income to the employee. If this were not the case, employers could provide small amounts on a monthly (or weekly) basis to significantly increase an employee's pay without paying taxes on those amounts.
Certain small non-cash gifts, however, can be ignored such as coffee mugs.
Meal reimbursement
Even providing reimbursement for meals can, in some cases, be considered taxable income. Employers commonly provide meal reimbursement for traveling employees, and this can be excluded, but only if the employee travels somewhere overnight. The IRS does not recognize “day meals” as excludable reimbursement.
For example, assume an employee leaves home at 6 a.m. for a business trip to another city, but returns the same day arriving home at 8 p.m. (and used a personal vehicle). The employer may provide mileage reimbursement without affecting the employee's income, since the trip involved business travel. However, if the employer pays for meals eaten during that trip, the value cannot be excluded - it would likely be taxable income to the employee because the employee did not travel overnight.
Minor benefits
Items that do NOT have to be accounted for are fairly minor and include things like occasional personal use of a business photocopier, local telephone calls, and snacks provided by the company.
Employers should review IRS Publication 15B, Employer's Tax Guide to Fringe Benefits, and Publication 5137, Fringe Benefit Guide for details on how to determine which benefits can be excluded, and how to track benefits that must be accounted.
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['Compensation']
['Compensation', 'Taxes, Employment', 'Payroll']
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