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I am a salaried employee. Occasionally I use my own credit card for company business. When I am reimbursed I receive a separate check from my regular paycheck. My company does not tax the reimbursement but they do add it to my running gross earnings total for the year. At the end of the year instead of a gross of say $50,000 (my regular salary), my gross will be $51,000 because I've put in for $1,000 in reimbursement. Is this correct accounting?

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See this question and its answer and comments for some information. –  Dilip Sarwate Oct 30 '12 at 16:34
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What is the exact language on the stub? I used to get a stub from an employer that totaled expense reimbursements with salary (for whatever reason), but it wasn't included in my W-2 (i.e. not taxable). –  Phil Sandler Oct 31 '12 at 2:22

4 Answers 4

Not correct. First - when you say they don't tax the reimbursement, they are classifying it in a way that makes it taxable to you (just not withholding tax at that time). In effect, they are under-withholding, if these reimbursement are high enough, you'll have not just a tax bill, but penalties for not paying enough all year. My reimbursements do not produce any kind of pay stub, they are a direct deposit, and are not added to my income, not as they occur, nor at year end on W2.

Have you asked them why they handle it this way? It's wrong, and it's costing you.

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I wouldn't necessarily say that the company is handling it incorrectly. In order for that reimbursement to be a nontaxable payment to the employee, I believe that the company has to have in place a plan for such reimbursements wherein the employee has to submit appropriate paperwork (receipts, etc) to the employer, the employer's accounting department has to approve that the expense is a legitimate business expense, and then the reimbursement is nontaxable. Absent such a plan, any payments from employer to employee (with possible exception of gifts less than $25 in value) is taxable income. –  Dilip Sarwate Oct 30 '12 at 16:17
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(Continued) The company should have such a reimbursement plan in place if an employee is asked to buy something for company use and is later re-imbursed for it. So, yes, the company is abusing its employees and it is going to cost the employee (who could only deduct it on Schedule A as a Miscellaneous Deduction and then only to the extent that the total Miscellaneous Deductions exceed 2% of AGI) both in terms of income taxes as well as possibly for penalties and interest for not having paid tax in timely fashion. –  Dilip Sarwate Oct 30 '12 at 16:22
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@DilipSarwate - If it's a true business expense, in which the employee is transacting a purchase that would otherwise be handled by a large company's admin or purchasing dept, my answer stands. It's an odd middle ground where the item is reimbursable, yet taxable. –  JoeTaxpayer Oct 30 '12 at 18:28
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@JoeTaxpayer My point is that the employer has to have a plan in place for reimbursements of such purchases (which requires submission of original receipts, normal accounting procedures, etc) in order for the employer to deduct the payment to the employee as an ordinary business expense (or to depreciate the cost) instead of wages paid to the employee. Not having such a plan in place and yet demanding that employees make purchases with personal funds and then reimbursing them for the items as W-2 wages is an abuse of employees, but it is not illegal as far as I know. –  Dilip Sarwate Oct 30 '12 at 18:51
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While I agree that this is wrong, the important thing is not what it says on your pay stub, the important thing is what it says on your W2. As long as they don't appear on your W2 you will be OK. But having them show up on your pay stub is not a good sign. –  DJClayworth Oct 30 '12 at 19:02

What they are doing is wrong. The IRS and the state might not be happy with what they are doing.

One thing you can ask for them to do is to give you a credit card for business and travel expenses. You will still have to submit receipts for expenses, but it will also make it clear to the IRS that these checks are not income.

Keep the pay stubs for the year, or the pdf files if they don't give you a physical stub. Pay attention to the YTD numbers on each stub to make sure they aren't sneaking in the expenses as income.

If they continue to do this, ask about ownership of the items purchased, since you will be paying the tax shouldn't you own it?

You can in the future tell them "I was going to buy X like the customer wanted, but I just bought a new washer at home and their wasn't enough room on the credit card. Maybe next month"

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The IRS and the state might not be happy with what they are doing. - so long as the income is reported to them they do not care who has the tax liability. –  user4127 Nov 9 '12 at 19:57

As @Dilip suggested in the comments, the problem is the accountability of the reimbursement plans. In order for the reimbursement to be non-taxable, there has to be a reimbursement plan and policy set up by the employer, it has to be done per receipt, and accounted for correctly. If the employer just cuts you a check - the conditions may not be met, and as such - the reimbursement becomes taxable.

In your case, it seems like the employer has not set up a proper (accountable) reimbursement plan, thus your reimbursements are taxable. @Joe pointed out that since the employer also doesn't withhold taxes (as he should), you may have an unexpected tax bill on April 15.

This Chron article describes the distinction between the accountable and non-accountable plans. Only with the accountable plans the reimbursements are non-taxable.

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Thanks for all the comments. I am going to look at our company policy manual (recently updated & distributed). –  Mark Oct 31 '12 at 0:33

After reading OP Mark's question and the various answers carefully and also looking over some old pay stubs of mine, I am beginning to wonder if he is mis-reading his pay stub or slip of paper attached to the reimbursement check for the item(s) he purchases. Pay stubs (whether paper documents attached to checks or things received in one's company mailbox or available for downloading from a company web site while the money is deposited electronically into the employee's checking account) vary from company to company, but a reasonably well-designed stub would likely have categories such as

  • Taxable gross income for the pay period: This is the amount from which payroll taxes (Federal and State income tax, Social Security and Medicare tax) are deducted as well as other post-tax deductions such as money going to purchase of US Savings Bonds, contributions to United Way via payroll deduction, contribution to Roth 401k etc. Employer-paid group life insurance premiums are taxable income too for any portion of the policy that exceeds $50K. In some cases, these appear as a lump sum on the last pay stub for the year.

  • Nontaxable gross income for the pay period: This would be sum total of the amounts contributed to nonRoth 401k plans, employee's share of group health-care insurance premiums for employee and/or employee's family, money deposited into FSA accounts, etc.

  • Net pay: This is the amount of the attached check or money sent via ACH to the employee's bank account.

  • Year-to-date amounts: These just tell the employee what has been earned/paid/withheld to date in the various categories.


Now, OP Mark said

My company does not tax the reimbursement but they do add it to my running gross earnings total for the year.

So, the question is whether the amount of the reimbursement is included in the Year-to-date amount of Taxable Income. If YTD Taxable Income does not include the reimbursement amount, then the the OP's question and the answers and comments are moot; unless the company has really-messed-up (Pat. Pending) payroll software that does weird things, the amount on the W2 form will be whatever is shown as YTD Taxable Income on the last pay stub of the year, and, as @DJClayworth noted cogently, it is what will appear on the W2 form that really matters.

In summary, it is good that OP Mark is taking the time to investigate the matter of the reimbursements appearing in Total Gross Income, but if the amounts are not appearing in the YTD Taxable Income, his Payroll Office may just reassure him that they have good software and that what the YTD Taxable Income says on the last pay stub is what will be appearing on his W2 form. I am fairly confident that this is what will be the resolution of the matter because if the amount of the reimbursement was included in Taxable Income during that pay period and no tax was withheld, then the employer has a problem with Social Security and Medicare tax underwithholding, and nonpayment of this tax plus the employer's share to the US Treasury in timely fashion. The IRS takes an extremely dim view of such shenanigans and most employers are unlikely to take the risk.

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