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Reimbursing Employees' Temporary Living Expenses

You've landed a large job in a community about eight hours away from your home base. You estimate the project will take three months and will require a half dozen workers and a foreman. Since you can't expect your employees to commute back and forth each day, you've made arrangements for them to live in a motel near the site for the duration of the project. Your question: What is the best way to handle payments for the cost of lodging, food, and other expenses for the crew?

Set Up an Accountable Plan

An accountable plan is a reimbursement or expense allowance arrangement that must meet three basic criteria:

1. The expenses must have been incurred in connection with services performed for your company.
2. Employees must "adequately account" for their expenses. (Specific requirements apply.)
3. Employees must return any excess reimbursement or allowance within a reasonable period.

Under this arrangement, your employees would not be required to report the reimbursements as income, and your company would not owe any payroll taxes on the reimbursed amounts. Your company can deduct the expenses, subject to the 50% limit on meal and entertainment expenses.

Consider Per Diems

Independent contractors are generally not under the direct supervision and control of the business and do not receive detailed instructions about how work is to be performed. In short, the extent to which a business directs and controls what a worker does and how it is done is critical.

Financial Matters

This approach to employee business expenses helps simplify your business's recordkeeping. Instead of reimbursing actual expenses, you would pay a per diem allowance no higher than the applicable federal per diem rate. Per diem rates vary for different parts of the country since the cost of living varies from place to place. Employees will still have to substantiate the time, place, and business purpose of their trips under the per diem method.

Employees may receive excludable travel reimbursements while they are temporarily away from their "tax home" on business. However, if an assignment is indefinite (lasting more than one year), reimbursements are taxable.


The content contained within this newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used, by you for the purposes of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein. Therefore it is important that you seek appropriate advice. If you desire such advice, please contract a member of our firm.