If you are a business owner and have employees, you can reimburse or give an advance for expenses incurred while performing duties for you, the employer. These expenses include, but are not limited to necessary transportation, business entertainment, travel, meals and lodging. Typically, the employee who received the advance or reimbursement is required to account for all associated expenses and produce records and receipts for each item. In the case of an advance, the employee is also required to return all excess funds in a reasonable period of time. In this manner, the employee does not have to include these funds in gross wages, is not required to report these funds on a W-2 and are exempt from federal and state income tax withholding and employment taxes.
As the employer, you can deduct 100% of the expenses for the employee except in relation to meals and entertainment. Deductions for meals and entertainment are limited to 50% while they are away on company business and 80% if they are subject to the Department of Transportation rules. If the expense for food and beverage is excluded from the employee’s gross income, the 50% limit does not apply.
If you have questions about setting up or deducting employee reimbursements or advances, give us a call and we can discuss your options.