Generally, any payment to a nonresident is considered taxable income unless exempted by law. This would include reimbursements. An employer who provides reimbursements to employees has a choice of the plan under which the reimbursements are made. The plans recognized by the Internal Revenue Services (IRS) are the Accountable Plan and the Non-accountable Plan. At the University, reimbursement of expenses is made under an Accountable Plan.
Accountable Plans
Accountable Plan rules are found in Treasury Regulation 1.62-2. To qualify as an accountable plan, an employer's reimbursement arrangement must include all three of the following rules.
- A business purpose and connection of the expenses must be established. The expenses must be paid or incurred deductible expenses while performing services as an employee to the employer.
- The expenses must be adequately substantiated within a reasonable period of time. Receipts are required unless the reimbursement is made under a per diem plan. Substantiation must include:
- Name of the employee who incurred the expense
- Date and time the expense was incurred
- Place where the expense occurred
- Amount of the expense
- Business purposes of the expense
- Return any amounts to the payers which are over and above the substantiated business expenses within a reasonable period of time.
Reimbursements paid under an accountable plan are not taxable to the employee. They are not wages and are not subject to income tax withholding and payment of social security and Medicare.
Nonaccountable Plans
A nonaccountable plan is a reimbursement plan or policy which does not meet all the requirements for an accountable plan. Payments would be considered treated as paid under a nonaccountable plan if:
- The employer reimbursement plan does not require substantiation any expenses reimbursed to employees.
- The employee fails to substantiate expenses or fails to substantiate expenses in a timely manner.
Reimbursements that do not follow the Accountable Plan rules are deemed to be paid under a non-accountable plan. The reimbursements are reportable as wage income to IRS on Form W-2 and subject to income tax and employment tax withholding (or are reportable on Form 1042-S and subject to section 1441 withholding, as applicable).