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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29788
Experience:  Taxes, Immigration, Labor Relations
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Are reimbursements or allowances and clothing taxable

Customer Question

are reimbursements or allowances for tools and clothing taxable to an employee?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
Hi and welcome to our site!Unreimbursed employee business expenses are deducted on schedule A.But when expenses are reimbursed by an employer - these expenses are NOT included into wages.If the employer reimburses employees for job related expenses - such reimbursements might be excluded from taxable wages if paid under accountable reimbursement plan.In order to qualify as an accountable plan, your reimbursement or allowance arrangement must require that your employees meet all three of the following rules:1. There must be a business connection to the expenditure. This means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his/her 1040 income tax return.2. There must be "adequate" accounting by the recipient within a reasonable period of time. This means that your employees must verify the date, time, place, amount and the business purpose of the expenses. Receipts are required unless the reimbursement is made under a per Diem Plan.3. Excess reimbursements or advances must be returned within a reasonable period of time. Reasonable depends upon facts and circumstances..Reimbursements not made under accountable reimbursement plan must be reported as wages even if paid with a separate check.If your employer's reimbursement arrangement does not meet all three requirements, the payments you receive should be included in the wages shown on the Form W2.
Customer: replied 2 years ago.
allowances and reimbursements are paid to employees who work in a carbon plant where tools and clothing is often ruined by the carbon residue. Equipment, including vehicles and tools, are very difficult to clean and often soil anything it touches.
The employees who work at this plant need some sort of reimbursement or allowance for these items on a regular basis but I did not know how to issue the payments so as not to include it in wages.
Customer: replied 2 years ago.
tools, equipment and clothing utilized on the 'carbon' job cannot be utilized elsewhere.
Customer: replied 2 years ago.
(Posted by JustAnswer at customer's request) Hello. I would like to request the following Expert Service(s) from you: Live Phone Call. Let me know if you need more information, or send me the service offer(s) so we can proceed.
Customer: replied 2 years ago.
am I still online with 'Lev, Tax Advisor'?
Customer: replied 2 years ago.
I do need more information.
Expert:  Lev replied 2 years ago.
As an employer - you would need to establish an accountable reimbursement plan.
While that is not required - it might be better to have a written policy.
You may find here Sample Accountable Expense Reimbursement Plan.
Then - you must require every employer to report back in timely manner how reimbursements are used - specifically for tools and work clothing - there must be provided receipts.
You need to inform employees about such requirements.
For those who do not have "adequate" accounting and do not provide report within a reasonable period of time - you as employer woudl be required to report that amount as taxable wages.
In this case the employee might be able to deduct his/her reimbursed expenses on schedule A.
So - that would be very important to keep "adequate" accounting.
Regarding payments - it might be more clear to pay with separate checks and no withholding is required for such reimbursements.
Let me know if you need any help.