When is an expense reimbursement not taxable?
Under tax law, all payments are taxable unless there is an exception or exclusion. This includes expenses that ¾ÅÓÎÓéÀÖ¹ÙÍø has agreed to fund when the payee turns in receipts. The exception to used for expense reimbursements requires an accountable plan. An accountable plan is a provision in the IRS regulations that allows an employer to reimburse employees on a non-taxable basis when certain requirements are met. The IRS regulations include independent contractors in the definition of employee therefore the rules allow independent contractors to qualify for the accountable plan exception. There are three requirements: Business connection, substantiation and return of excess advances.
Business Connection
The business connection requirement means that the expenses are incurred by the employee for services performed as an employee for the payer. The reimbursement or advance must be payment for the expenses and must not be an amount that would have otherwise been paid to the employee as wages.
For example, if an employee travels to an out of town conference which directly related to the employee's job,