When Do Business Miles Count as Income?

It’s almost tax season again, and it is the last opportunity to make those last minute, end-of-the-year financial adjustments to ensure that you don’t owe a tax debt to the Internal Revenue Service and require IRS Tax Assistance. I was recently asked, “Why are my gas reimbursements from my W-2 employer counted as income on my Form W-2? Is this double taxation?” The best legal answer is, “it depends”.

If your employer reimburses you for your expenses, say vehicle expenses incurred while on the job, then it is possible that you may see your reimbursement amounts listed as supplemental income on your Form W-2, depending on your employer’s implemented expense reimbursement plan. If you are not adequately informed or prepared for this additional income, this could be a serious financial issue come tax day in April.

Whether your reimbursement amount will be treated as additional income on your Form W-2 depends on the reimbursement plan implemented by your employer, if any. If your employer uses what is called an “accountable” reimbursement plan, your business reimbursements should not be included as income on your Form W-2, so long as the accountable reimbursement plan rules are followed. Accountable reimbursement plan rules must specify: 1) That the reimbursed expense must have a business connection and was paid or incurred while performing services as any employee; 2) That the expense is documented or accounted for within a reasonable amount of time; and 3) Any excessive reimbursement is returned to the employer within a reasonable amount of time.

Alternatively, reimbursements paid by an employer under a non-accountable plan are treated as supplemental wages. Supplemental income may also include bonuses, commissions, overtime pay, and vacation allowances. A non-accountable plan is a reimbursement arrangement that does not require the employee to account for, or prove, business expenses to an employer or does not require the employee to return the employer’s payments that are more than the employee’s proven expenses. If you have reimbursable business expenses, your employer should tell you what type of reimbursement plan is used and what records you must provide if your employer uses an accountable reimbursement plan. However, it is the employer, not the employee that makes the decision on the type of reimbursement plan to implement. An employee who receives reimbursement compensation under a non-accountable reimbursement plan, is not permitted to try and convert the reimbursement amounts received to payments under an accountable plan by voluntarily accounting for their expenses and returning excess reimbursements to the employer.

However, if your employer uses an accountable reimbursement plan, and the requirements of the plan have been satisfied, then your business reimbursements should not be reported on your Form W-2. If your employer issues you a Form W-2 with the reimbursement amounts included as income, and all the rules for accountable reimbursement plans have been met, then a corrected Form W-2 should be requested from your employer.

Christian Montgomery is a West Sacramento resident and a tax attorney at Montgomery & Wetenkamp, Tax Relief Attorneys, located in Sacramento. For more information regarding tax matters contact Montgomery & Wetenkamp at (916) 452-7033 or online at www.mwattorneys.com. This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.