Construction industries that maintain mobile workforces often have employees work in various locations which causes them to incur out-of-pocket business costs. You, as an employer, may reimburse the employee for these costs using either an accountable or non-accountable plan.
An accountable (reimbursement) plan meets the following criteria:
- The purpose is to reimburse employees for allowable business expenses paid or incurred in their performance of service as employees.
- Identifies payments made under the plan.
- Requires substantiation of the expenses reimbursed.
- Requires the return of unsubstantiated payments within a reasonable time.
Any reimbursement plan that does not meet all of the four criteria above would be a non-accountable plan.
Both accountable and non-accountable plans have their advantages and disadvantages. The advantages of using an accountable plan are that the employer receives a business deduction, the reimbursement is non-taxable to the employee, and the employer does not incur additional payroll-related costs. The downside of an accountable plan is that it puts a higher demand on documentation of expenses.
As part of a reimbursement plan, companies may reimburse travel-related costs, including local transportation costs and travel requiring overnight stays. Employee commuting costs are not considered business-related travel so any reimbursements from the employer would be taxable income to the employee. To make this determination, there needs to be clear definition of the employee’s workplace. The IRS states that an employee can have three types of workplaces: Regular, Temporary, or Multiple workplaces. A regular workplace place is any location that any employee works at on a consistent basis. A workplace meets this requirement when an employee performs services at a location for longer than a year. On the other hand, a temporary location is any job site in which the employee is expected to work at for one year or less. Lastly, there are multiple job workplaces when a contractor employee is required to visit multiple locations during the workday. Depending on the type of workplace and the type of reimbursement plan chosen (accountable or non-accountable), the reimbursement of travel-related costs may be taxable to the employee.
Types of Accountable Plan Methods
A contractor has a few different accountable plan methods that they can use to reimburse their employees for their mobile expenses such as transportation and travel expenses. The first method is the “Direct Reimbursement” method. This method is for employees to submit documentation to support expenses that they incurred on the employer’s behalf. These expenses are then reimbursed to the employee as long as the expenses meet the following criteria: substantiation of time, place, business purpose, and identification of payments made. This method is fairly simple but requires employees to fill out reimbursement forms and maintain accurate documentation. This can cause issues when an employee has a high volume of documentation or is traveling for extended periods of time.
The second method is the “Per Diem” method. This method allows an employer to establish a reimbursement rate that is given to the employee to use for their mobile work expenses. The main advantage to this method is that it reduces the burden of keeping documentation of the expenses. For an employer to use this method they first must have employees incurring ordinary and necessary expenses while preforming services away from home. These are things like meals, lodging, and other incidental expenses. Once there are necessary expenses, then there must be a reasonable calculation for an amount of per diem that does not exceed the anticipated expenses. Lastly, the per diem must be at or below the applicable Federal per diem rate. An employer does have the option to exceed the federal rate but then must include the excess per diem in the employee’s wages.
The last accountable plan that is available to employers is the “Company-provided Assets” method. This method is mainly used for company automobiles, but can be for lodging and other working condition fringe benefits such as cell phones and computers when the employee is required to work at a location away from the home.
For a company-owned vehicle, the employer must determine the qualified business use of the asset and how to handle the employee’s personal use. To do this, the employer can choose from one of the four allowable plan methods: Fair Market Value Method, Lease Value Method, Cents-per-mile Method, and Commuting Method. To find the specifics for each of these methods, see IRS Publication 15-B.
Another asset used in this method is employee lodging. For an employer to provide lodging, the lodging must be on the business premises, it must be for the employer’s convenience rather than the employee’s, and the acceptance of the lodging must be a condition of the employee’s employment. If the employee has the option to decline or accept cash in lieu of the lodging, it will not count as an excludable company-provided asset.
For more information on mobile workforce guidelines, or for template documents, please download our whitepaper in the Construction Resources section of our Resource Library. If you have questions about the content of this article, or would like to speak with someone further about how to choose the right reimbursement plan for your company, contact our office at firstname.lastname@example.org or 703.385.8888.
Andrew K. Venzke, CPA
Brandon T. Davis