December 2020 Client Profile

Kara owns a consulting business and in 2021 her employees will be traveling out of state for work. She’s never had to reimburse employees for travel expenses so she’s wondering whether to give them a travel allowance or reimburse them for actual expenses.

The method Kara chooses can affect her employees’ taxes. Reimbursing her employees for actual expenses they incur won’t trigger taxes. Kara will want to have employees submit an approved expense report with receipts to request reimbursement.

Alternatively, travel allowances can be taxable income to her employees. If the employee is not required to account for all of their travel expenses, then the entire travel allowance is taxable. Things like providing a monthly car allowance without requiring mileage logs causes the full allowance to be taxable. But if the employee is required to account for travel expenses by submitting an expense report with receipts, they will be required to return any excess allowance within a reasonable time. If the excess isn’t returned, it becomes taxable.

However, if Kara uses the IRS’ per diem rates and has employees account for expenses, any excess doesn’t need to be returned and isn’t taxable.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.