Taxable Scenarios Regarding Employees Overview

Review the below standard for guidance on expenses and reimbursement under the accountable plan.

Understanding standards related to taxable scenarios for employees is crucial. A clear understanding helps ensure compliance with tax regulations and aids with optimizing financial outcomes. Awareness of tax obligations helps prevent legal issues, penalties, and negative audit findings. Employers must accurately report and withhold taxes. Navigating the complexities of taxable scenarios is essential for effective financial management, compliance, and overall employee satisfaction.

The Office of the University Controller is in the process of converting Standard Operating Procedures (SOPs) into IU accounting standards. As such, these SOPs are no longer being updated. Information is as current as of the date of last revision available on the SOP. Please continue to check back as SOPs are converted into standards within this book.

• TSOP 3.03 – Calculating Box Totals on Form W-2
• TSOP 3.04 – Complimentary Tickets Provided to Employees
• TSOP 3.06 – Education Payments Paid for Employees
• TSOP 3.07 – Personal Use of an IU Vehicle
• TSOP 3.08 – Free or Discounted Housing Provided by IU
• TSOP 9.03 – Prize and Awards

UCO-TAX-6.01: Expenditures: Expenses and Reimbursement Under the Accountable Plan

Prerequisites

Prior to reading the following standard on Expenses and Reimbursement Under the Accountable Plan, it is beneficial to review the below items to gain foundational information:

1. FIN-ACC-50: Expenditures: Hospitality
2. FIN-ACC-590: Expenditures: Gifts to Employees, Non-Employees, and Students
3. FIN-ACC-610: Allowable Travel Payments Faculty Members on Leave
4. FIN-ACC-620: Expenditures: Expenses and Reimbursement Under the Accountable Plan 
5. FIN-TRV-01: Travel
6. FIN-PURCH-05: Prohibited Purchases

Preface

This standard provides guidance and is a reference to units/departments on the rules and requirements of the accountable plan in accordance with Internal Revenue Service (IRS) for expenses and reimbursement to employees, students, and outside parties.

Introduction

The accountable plan is a university defined plan for reimbursement and substantiation of certain business expenses made by employees and non-employees, including expenses made utilizing procurement cards. Under this plan, the reimbursement that the individual receives for expenses claimed is not included in their income. Employees are required to substantiate expenses and return any excess reimbursement within a reasonable period of time. If any requirements of the university’s defined accountable plan rules are not met, then the business expense will fall under the IRS nonaccountable plan rules and will be considered taxable income to the payee.

Importance and Impact of Accountable Plan Expenses

The IU policy FIN-ACC-620 Expenditures: Expenses and Reimbursement Under the Accountable Plan, which outlines reimbursement and/or substantiation for business expenses incurred in connection with providing services to the university, follows the IRS definition of an accountable plan. If a business expense is not made following the accountable plan rules, then it is deemed to be paid under a nonaccountable plan and considered taxable income to the payee if reimbursed. Understanding the taxability of expenses could have an impact on the employee’s Form W-2 and the department’s budget.

Nonaccountable plan reimbursements to employees for travel reimbursement, out-of-pocket expenses, and other unsubstantiated expenses (e.g., procurement card purchases) will be included in the employee’s gross annual income. The amounts are required to be reported as wages or other compensation on the employee’s Form W-2, and are subject to withholding and payment of employment taxes. For non-employees, amounts will be included as income on a Form 1099-MISC subject to the annual reporting threshold.

Accountable Plan Expenses Process

The primary responsibility for compliance with this standard rests with the following individuals, in order of accountability:

• Individual who incurred the expense and is requesting the reimbursement or is required to substantiate a procurement card purchase
• Fiscal officer of the account from which the payment is being requested
• Supervisor who authorized and approved the business or travel expenses

For reimbursements or purchases made using a procurement card to be considered nontaxable to the payee, expenses must follow the three IRS requirements:

1. Business Connection
2. Substantiation/Reconciliation (within 60 calendar-days of purchase or return date of trip)
3. Return of Excess Funds (only applicable to advanced cash payments to employees)

When the business expense does not satisfy one or more of the listed requirements, the amount will be included in the payee’s gross income and reported as wages or other compensation.

1. Business Connection Requirement

An expense incurred in achieving the university’s mission or directly related to the conduct of official university business and must be:

• Necessary
• Appropriate to the activity
• Reasonable in amount
• Serve a bona fide university purpose

It is the responsibility of the fiscal officer to ensure that the business connection requirement meets the criteria above in relation to the type of business and academic activities performed in their unit. An expense that serves primarily to furnish the individual with a social or personal benefit is not a business expense. Expenses that primarily benefit a student’s personal education are considered scholarships or fellowships and are not a business expense. These expenses do not meet the accountable plan criteria.

Examples:

Below are some examples of expenses covered under the accountable plan as it relates to employment and business connection:

• Business use of automobile, up to the current IRS standard mileage rate
• Business travel away from home: transportation, lodging, and meals on overnight trips
• Convention, conference, and workshop expenses, as it relates to employment
• Continuing education expenses, as it relates to employment
• Subscriptions, books, and software if IU is the ultimate owner
• Entertainment/hospitality expenses, if business connection requirement is met and if in compliance with IU Policy FIN-ACC-50 Hospitality Expenditures
• Sales tax on purchases made by employees within IU policy guidelines

The university will not reimburse or pay for expenses that are inherently personal in nature or against policy. The following list sites a few examples:

• Personal reading material, such as non-scholarly magazines, books, and newspapers
• Personal recreation or entertainment such as greens fees, sightseeing fares, theater tickets, entry fees, lift tickets, etc.
• Credit card delinquency fees and finance charges
• Dues in private clubs
• Gym and recreational fees, including massages, manicures/pedicures, and saunas
• Amenities such as movies, in-room bars, etc.
• Personal insurance costs such as life insurance or business travel insurance
• Parking tickets or traffic violations
• Any type of fine or penalties

2. Substantiation/Reconciliation requirement

Each business expense must be substantiated and reconciled within a reasonable period of time (60 calendar-days from date of purchase or return date of trip).

The accounting for all business and travel expenses, advances, and allowances must include:

i) The amount of each business expenditure and equivalent original receipt

ii) Dates of expenditure and location, if applicable

iii) Business purpose

i) The amount of each business expenditure

At a minimum, documentation for business expenses must include equivalent original receipts that reflect detail on what items were purchased, the cost of each item, the name of the vendor, proof of payment, and a date of transaction. Reimbursements to individuals for services purchased are not allowed as out-of-pocket expenses. Purchases for services must be processed through IU Purchasing, using university procurement guidelines.

When documentation does not exist, the Fiscal Officer must document the circumstances for the lack of supporting documentation and must include an explanation in the notes section of the appropriate expense system document.

Any purchases made with food stamps/SNAP benefits, personal store credits or reward/membership points will be considered unsubstantiated and not reimbursable. See below under “Application” for exceptions to policy.

ii) Dates of expenditure 

• 0-60 Days Timeline: The university has adopted the IRS Safe Harbor rule of 60 calendar-days, as a reasonable period of time to substantiate business expenses. Each business expense must be substantiated, where required, with the equivalent original receipt and reconciled in the appropriate accounts payable, purchasing card, or travel system within 60 days of the date the expense was paid/charged or the return date of the trip. 

• 61-120 Days Timeline: Amounts that are substantiated beyond the 60 calendar-days are considered to fall under the nonaccountable plan rules. These reimbursements will be included in the employee’s gross income, must be reported as wages or other compensation on the employee’s Form W-2, and are subject to withholding and payment of employment taxes. Any payments made to non-employees falling under the nonaccountable plan will be considered taxable compensation and reportable on an applicable IRS tax form if they meet the current reporting threshold.

• 121+ Days Timeline: The university will not reimburse requests that fail to meet the business expense requirement or those that remain unsubstantiated after 120 calendar-days.

iii) Business purpose

The business purpose reason should be given in the supporting documentation of the appropriate expense system document. The business purpose of an expense may be obvious to the requester, but not necessarily to a third-party reviewer. The explanation needs to answer five basic questions:

1. Who was involved in the activity?
2. What activity was performed?
3. Why was the activity done and how did it benefit IU?
4. When did the activity occur?
5. Where did the activity take place?

Examples:

Business Meal Procurement Card Example

ZACK MAYO SEARCH CANDIDATE — WHO: Zack Mayo, PhD (search candidate), and Professor Emil Foley (committee head). WHAT: Dinner with search candidate for IU position. WHY: Dinner with potential candidate for position within IU. WHEN: March 22, 2016. WHERE: Scott’s Seafood, Bloomington.

Travel Reimbursement for Guest Speaker Example

KLINE PRESENTATION, 7/4/2013 — WHO: Kevin Kline. WHAT: Paid for travel related to participation in a panel discussion on Dramatic Movies in American Cinema. WHY: Part of the Drama Department’s Summer Seminar Series. WHEN: July 4, 2013. WHERE: Indiana Memorial Union.

3. Return of excess funds requirement

If an exception was granted and an advance payment was disbursed to an individual, the entire amount must be substantiated, reconciled, and accounted for or the funds must be returned to the university. The individual must return to IU, within 120 calendar-days, any amount in excess of the substantiated expenses.

Travel advances are one of the few instances where an advance payment made to an employee is acceptable. These advances are approved on a case-by-case basis by IU Travel Management Services. The advance must fulfill the following terms to meet the return of funds requirement.

• Substantiating receipts must be submitted and reconciled in appropriate expense system within 60 calendar-days of the payment or return trip date
• Any unused advanced funds must be repaid within 120 calendar-days of the payment

NOTE: The return of excess funds rule does not relate to per diem and mileage reimbursements. Refer to IU Travel Management Services for information on per diem and mileage rates and IU guidelines for travel reimbursements.

4. Nonaccountable plan reimbursements

a) Out-of-Pocket and Travel Reimbursements

Reimbursement claims not adhering to the requirements of the accountable plan will be considered for approval by the fiscal officer only in the case of extenuating circumstances beyond the control of the employee. The fiscal officer will decide, on a case-by-case basis, whether claims failing these limitations can be reimbursed via approval from VPs/VCs/Dean or designee, though still taxable to the employee.

The written justification for exceptions to policy will be used to make this determination. Below are some examples of justifications that should and should not be considered for reimbursement.

Examples:

Not Justifiable Circumstance

• Request for reimbursement after 120 calendar-days from the date paid or return date of trip
• Collecting receipts is an undue hardship
• Submitting expenses together over an extended period of time is more convenient
• The receipts were temporarily misplaced
• Unaware of the accountable plan requirements
• Meals involving only personnel where business is not conducted

Justifiable Circumstance

• Out of the country on extended leave and unable to submit the receipts
• The department misplaced the receipts submitted within the 60-day limit
• Forgetting to reconcile in the appropriate expense system within the 60-day limit but still had a valid business expense

If the facts and circumstances do not justify the late reimbursement request, then the expense will not be reimbursed. If the facts and circumstances do justify the late reimbursement request, payment will be considered income subject to withholding in the case of an employee and appear on their W-2 form. Any taxable reimbursements made to non-employees will be subject to 1099 reporting. If the time period exceeds 120 calendar-days, the reimbursement cannot be entered in the appropriate expense system and is denied.

b) Unsubstantiated P-card Purchases

Similar to out-of-pocket expenses, p-card purchases not adhering to the requirements of the accountable plan will be considered for approval by the fiscal officer only in the case of extenuating circumstances beyond the control of the employee/delegate. The fiscal officer will decide, on a case-by-case basis, whether claims failing these limitations can be substantiated via approval from VPs/VCs/Dean or designee, though still taxable to the individual who received the benefit of the purchase.

If the facts and circumstances do justify the late reimbursement request, payment will be considered income subject to withholding in the case of an employee and appear on their W-2 form. Any taxable purchases made on behalf of non-employees will be subject to 1099 reporting. If the time period for an unsubstantiated p-card purchases exceed 120 calendar-days, the procurement card holder and/or department will be subject to sanctions determined by the Office of Procurement Services.

Tax Reporting for Nonaccountable Plan Payments

Employees: Employee expense claims ruled as taxable payments will be routed to payroll through the appropriate expense system. The reimbursement will be paid through payroll to the employee {using the code TVR}. These amounts are treated as paid under a nonaccountable plan. The payment is included in the employee’s gross income, must be reported as wages or other compensation on the employee’s Form W-2, and is subject to withholding and payment of employment taxes (FICA and income tax). These amounts will appear no later than the first payroll period following the exception approval.

Non-Employees: Any reimbursements made to non-employees falling outside the accountable plan will be considered as reportable income. This is considered fixed, determinable income and reportable via a Form 1099 as non-employee compensation. The reimbursement will be made through Buy.IU with the payment reason reimbursement for out-of-pocket expense and object code 4520. A note should be added by the initiator stating, “This is a taxable reimbursement and coded as 4520 per procedure.”

Conclusion

If a payment meets the requirements of 1, 2, and 3 of this section, then the amounts paid are treated under the accountable plan. These amounts are excluded from the payee’s gross income [not taxable]. When the payment does not satisfy one or more of the requirements listed (section 4), it will be treated as being paid under the nonaccountable plan. The payment will, therefore, be included in the payee’s gross income and reported as wages or other compensation [taxable]. If the time period exceeds 120 calendar-days, the university will not reimburse the expense.

Application

Refer to the Accountable Plan Flow Chart for procedures related to expenses and reimbursement under the accountable or nonaccountable plans.

Requirements and Best Practices

Requirements

1. Fiscal officers are responsible to ensure that all accountable plan business expenses meet 3 criteria (business connection, substantiated/reconciled within 60 calendar-days of expense or return trip date, and excess funds are returned in regard to cash advances). If the 3 criteria are not met, an exception for reimbursement can be obtained by the University Controller or Controller’s delegate and reimbursed under the nonaccountable plan. Payments over 120 days or that do not meet the business connection requirement may not be reimbursed.
2. Fiscal officers are responsible for ensuring procurement card and accountable plan reimbursement controls are appropriate and monitored within their departments, including timely reconciliation of expenses. It is recommended that any departmental specific practices be documented in the event of an audit.
3. All payments for services require a form W-9 or W-8 from the entity providing the service (even if payment is not directly paid by Indiana University and is, instead, being reimbursed). No employee is authorized to pay directly for a service provided to Indiana University either via reimbursement or through a card issued by the university. Payments for services must go through University Procurement Services.
4. Reimbursement policies and procedures apply to all individuals who provide services to the university and are reimbursed for university approved general business expenditures. To ensure compliance, it is the fiscal officer’s responsibility to ensure controls are in place within their department to inform non-employees and volunteers who provide services of the university’s financial policies and procedures prior to the non-employee’s engagement.
5. Personal reimbursement is neither a sanctioned method for institutional purchases nor the proper procedure for institutional acquisition except under extreme and unusual circumstances. The university provides procurement channels through the Office of Procurement Services for all acquisitions that are governed by institutional policies. This procedure is not intended to circumvent or avoid the appropriate policies and procedures for the purchase of goods, services, or travel as identified by those policies.
6. Fiscal officers should ensure that ongoing monitoring is in place to mitigate fraud and misappropriation of funds.