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Don’t let travel reimbursements become
taxable income
Additional resources for expense
management
When you reimburse an employee for travel
expenses, the last thing that employee expects
is to owe taxes on the money. And you as an
employer don’t want to be responsible for tracking
and reporting it as income.
IRS Publication 463, “Travel, Entertainment, Gift,
and Car Expenses”
Fortunately, employee travel reimbursements are
usually exempt from taxation – provided you follow
the guidelines we summarize here. For more
detailed information, see the “Additional
Resources” on the back panel of this brochure.
When travel reimbursements do
not meet the requirements for tax
exemption
When travel expense reimbursements do not
meet the requirements for tax exemption,
they become fully taxable for income and
employment tax reporting and withholding.
You should report them in Boxes 1, 3, and 5
on the employee’s Form W-2. Generally, no
special Box 12 reporting is required, but you
may elect to report them in Box 14.
While this publication is addressed to the taxpayer,
you’ll find it a valuable reference for determining which
expenses are considered business-related by the IRS.
Visit www.irs.gov and search for “Publication 463.”
ADP’s Expense eXpert® automates your travel
expense reimbursement process
Automating expense management in conjunction
with an online payroll service can reduce reporting
and processing time and overall costs by as much
as 70%* or more. ADP’s Expense eXpert® gives you
efficient expense tracking, reporting, and
management, all in one powerful on-demand service:
• Employees use an Internet connection and any
standard browser to create and submit expense
reports from the office, home, or while on the road.
• Standard templates and smart lists with prepopulated fields enhance expense tracking, as well
as reporting speed and accuracy.
• Expenditures using company-issued cards can be
downloaded and imported into reports.
What Every
Payroll Manager
Should Know
About
Travel Expense
Reimbursements
• Expense tracking reports are automatically routed
to authorized parties for review and approval.
• E-mail notifications alert your employees to report
approval and payment status.
For more information, contact your
ADP Representative, or visit
www.majoraccounts.ADP.com/expense.
*American Express and PricewaterhouseCoopers
Portions of this brochure are from an article by Nora Daly,
CPP, a Senior Product Manager at Oracle Corp. The article
originally appeared in the October 2006 issue of PAYTECH
magazine, published by the American Payroll Association
(APA). For a free sample issue of PAYTECH, call APA
Membership Services at (210) 224-6406.
Automatic Data Processing, Inc.
One ADP Boulevard
Roseland, NJ 07068-1728
The ADP Logo is a registered trademark of ADP of North America, Inc.
Expense eXpert is a registered trademark of ADP, Inc.
All other trademarks and service marks are the property of their respective owners.
03-333-037 2M Printed in USA © 2007 ADP, Inc.
When must you report expense
reimbursements as taxable income?
How do the requirements differ for
daily travel vs. overnight travel?
Read on to find out…
This guide is provided for informational purposes only. ADP is
not engaged in the practice of law and does not render legal
advice. If you require legal or other expert assistance, seek the
services of a competent professional.
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Requirements for nontaxable
overnight travel expense
reimbursements
Reimbursements for overnight business travel can
be excluded only if the expenses are incurred while
the employee is temporarily away from home and
on business for your company. Specifically:
• The employee’s duties require him or her to
be away from the general area of home
substantially longer than an ordinary day’s work,
and…
• The employee needs to sleep or rest to meet
the demands of work while away from home.
Generally, a temporary assignment in a single
location is one that is realistically expected to last for
one year or less. In some cases, you may believe
that an assignment will qualify as temporary, but
later discover that the assignment will last longer
than a year. When that happens, reimbursements
for expenses incurred after it became clear that the
assignment would last more than a year become
fully taxable for income and employment tax
reporting and withholding.
Reimburse employees for
substantiated overnight expenses…
Employee expense reimbursements are generally taxfree and do not require reporting on the employee’s
W-2 if the payments are made under an accountable
plan. To qualify, the plan requires:
• A business connection.
• Substantiation, including the date, amount, business
purpose, and place the expenses were incurred.
Employees must provide receipts for all expenses
of $75 or more and all lodging receipts, regardless
of the amount. (Your company can set a lower limit,
if it prefers.)
• Return of any money advanced for unsubstantiated
amounts within a reasonable time after the travel
takes place.
…or pay a fixed per diem rate
Alternatively, you can pay for travel expenses
using a per diem plan. Per diems require only
that your employee substantiate the time, place,
and business purpose of these expenses. The
allowance you set will be deemed substantiated
as long as it does not exceed IRS-established
federal per diem rates for two categories:
• Lodging – excluding lodging taxes which can
be reimbursed as a miscellaneous expense.
• Meals and Incidental Expenses (M&IE) –
fees and tips, transportation between lodging
or business and restaurants, postage for filing
expense reports, and paying employer-provided
credit card bills. The federal per diem rates
for these two categories are listed in IRS
Publication 1542. To download it, visit
www.irs.gov and search for “Publication 1542.”
Two methods for determining which
per diem rate to apply
A third option: combining per diem
and reimbursement
A third option is to reimburse lodging at the actual
cost and pay a per diem for remaining expenses at
the M&IE rate. You may do this only if one of the
following applies:
• You will reimburse the employee for their actual
lodging expenses or directly pay the lodging
provider.
• You will actually provide the lodging.
• You reasonably expect there will be no lodging
expenses.
• You calculate a separate lodging allowance on a
basis similar to that used for calculating the
employee’s wages or other compensation, such as
hours worked or miles traveled.
For more information, visit www.irs.gov and search
for “per diem.”
There are two approved methods for using the rates
in IRS Publication 1542:
Requirements for nontaxable daily
travel expenses
1. High/low substantiation: Under this method,
close to 40 localities in Publication 1542 qualify
for a “high” 2007 per diem rate of $246. Any
locality not listed as “high” is automatically
considered “low cost” and qualifies for a per
diem rate of $148.
In 1999, the IRS ruled that reimbursements for an
employee’s daily transportation expenses need not
be included in the employee’s income if:
2. Locality of travel: Publication 1542 also lists per
diem rates for hundreds of specific localities
within the United States. With this method, you
use the per diem rate for the individual location.
For travel in 2007 to any location not listed, apply
the standard rate of $99 ($60 for lodging, $39
for M&IE).
You can use high/low per diem rates for one
employee and locality of travel for another. But the
two rates cannot be mixed when reimbursing the
same employee within a given year.
• The daily travel was between the employee’s
residence and a temporary work location outside
the metropolitan area where the employee lives
and normally works.
• The employee has one or more regular work
locations away from home and the travel was
between the employee’s residence and a
temporary work location.
• The employee’s home is his or her principal place
of business and the travel was between the
employee’s residence and another work location.
Qualifying expenses include not only mileage, but
incidental expenses such as parking fees and tolls.