Authored by: Jordin Hinckley, Orem office.  Jordin is a tax intern starting her first year of the masters program at Brigham Young University.  She has been with Cook Martin Poulson, PC for three months.

Many employers are currently using a Nonaccountable Plan to reimburse their employees.  As a result, all reimbursements are being included in each employee’s W2 as income, and employers are paying FICA taxes and withholding an amount on the reimbursements.

Using an Accountable Plan to reimburse employees for business expenses can provide a large benefit to both employers and employees.  The following paragraphs explain the conditions that must be satisfied to qualify for an Accountable Plan, and the benefits of doing so.

Qualifications:

1.  Expenses have a Business Connection

• Expenses being reimbursed must be in connection with services provided as an employee.
• The expense must be one that the employee could deduct on his/her tax return.

2. Expenses are Substantiated       

• Substantiation generally consists of receipts or cancelled checks that show the nature and amount of the expenditure.
• Expenses deemed to have been substantiated are included.  For example, using the mileage allowance rate rather than the actual travel expense is acceptable.

 3.  Excess Reimbursement is Returned in a “Reasonable Period of Time”

The reasonable period of time depends on the facts and circumstances of each situation.  However, the following actions listed are considered reasonable.

Employee receives an advance within 30 days of the time he/she has an expense.

• Employee adequately accounts for expense within 60 days after the expense was paid or incurred.
• Employee returns any excess reimbursement within 120 days after the expense was paid or incurred, or 120 days after a quarterly statement for outstanding advances is provided.

Benefits:

 1. Employer Benefits

• Reimbursement amounts given by the employer are not considered wages and employers need not pay FICA taxes on them or worry about withholding an amount from them.
• Employers can consider reimbursing all substantiated expenses and decreasing employee’s current wages.

 2.  Employee Benefits

• Amounts received by the employee are not recognized as income and do not get reported on form W-2.
• If expenses equal reimbursements, employees do not need to complete Form 2106.

If you have questions regarding Accountable Plans, please feel free to contact us at 435-750-5566 or 801-467-4450.

Authored by: Andrew Burnett.  Andrew is a staff accountant in the Salt Lake City office of Cook Martin Poulson, PC. 

Do you own a restaurant?  Do your employees receive a significant amount of tips daily? The restaurant industry is unique in many ways.  One of those ways in which the industry is different is the tracking and recording of tips received by employees.  Employees who receive tips have three primary responsibilities:

1. Record all tips in writing
2. Sign a statement to the employer on recorded tips
3. Keep a record of the daily tip receipts (tip log – form 4070A)

If the employer keeps an accurate tip log (form 4070A) for each employee, then the employer could benefit from a significant tax credit at the end of their tax year.

The FICA Tip Credit is a tax credit for restaurants for FICA taxes paid on tips which exceed the minimum wage.  This credit is calculated by using the federal wage rate (currently $7.25) to find the creditable tips received by the employee. 

For example, let’s suppose a full-time employee (40 hours) makes a weekly wage rate of $2.25 ($90) and receives tips of $350 for the week (total pay = $440).  The employer than deducts the federal minimum wage rate ($7.25 * hrs worked) from the $90 to get the amount of wages not subject to the credit ($200).  The creditable tips would then equal $150 ($350 – $200). The FICA taxes are computed from the creditable tips ($150 * 7.65%). The employer would qualify for $11.48 in FICA Tip Credit per pay period from that employee.  That is $596.70 in tax credits for the year for just that one employee! This tax credit could save restaurant employers, who qualify, thousands of dollars in their yearly tax return.