Employee Business Expense Taxable Wage Adjustments

Taxable Expenses

Taxable business expense reimbursements are included as additional salary in the employee's next payment.  If the employee has separated from the agency, the amount of salary reported is "grossed up" to accommodate the tax withholding.

The process for recording taxable business expense reimbursements for a current employee involves the following:

• Expenses are added to the employee's gross wages and are recorded against account 531660, Taxable Employee Expense Reimbursement.
• The expenses are taxed according to the employee's W-4 and NC-4 elections.
• The expenses are not subject to retirement contribution.
• The amount of the expense is added as a deduction using the following deduction codes, as appropriate:
  • 054 - Executive Car (Taxable)
  • 063 - Employee Telephone (Taxable)
  • 067 - Clothing Allowance (Taxable)

Note: The deduction code must be manually removed before the employee's next payment.

If the employee has separated from the agency and is not eligible for any pay, the amount of salary entered into the Central Payroll System must be "grossed up" to ensure the net pay amount is zero.  The calculation for the gross salary amount follows:

* Calculation based on 100% cost less 7.65% current FICA rate = 92.35%

The calculation should be verified by multiplying the gross salary amount by 6.2% for OASDI and 1.45% for HI and then adding the two products.  When added, the result must equal the difference between the gross salary amount and the deduction amount.  This verification allows for any rounding differences that may result during the payroll processing cycle. 

Once the gross salary amount is determined, the reimbursement is processed as follows:

• The gross salary amount is recorded against account 531660, Taxable Employee Expense Reimbursement.
• The expenses are taxed at the current flat rate.
• The expenses are not subject to retirement contribution.
• The amount of the expense is added as a deduction using the deduction codes listed previously.

When the payroll is processed, the Central Payroll Division remits a paper check for the amount of the deductions to the agency in order to reimburse the original Accounts Payable payment to the employee.  The agency must receipt the deposit of the reimbursement against the account from which the original employee reimbursement was made.

This policy applies to all State entities.

There are no exceptions to this policy.

• Accountable Plans
  To be an accountable plan, an employer's reimbursement arrangement must require you to meet all three of the following rules.
  
  1. The employee's expenses must be of the type for which a deduction would be allowed had they paid them themselves.
  2. The employee must adequately account to the employer for these expenses within a reasonable period of time.
  3. The employee must return any excess reimbursement or allowance within a reasonable period of time.

  If an employee's reimbursement meets the three rules for an accountable plan, the employer should not include any reimbursements of expenses in your income in box 1 of Form W-2.  Instead, the employer should include the reimbursements in Box 12 of the employee's Form W-2.

• Nonaccountable Plans
  A nonaccountable plan is a reimbursement arrangement that does not meet the three rules listed under Accountable Plans.
  In addition, the following payments will be treated as paid under a nonaccountable plan.
  
  1. Excess reimbursements the employee fails to return to the employer.
  2. Reimbursements of nondeductible expenses.

  The employer will add the amount of any reimbursement paid to the employee under a nonaccountable plan to their wages, salary, or other pay. The employer will report the total in Box 1 of the employee's Form W-2.