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I was sent to the store by an employer. While at the register I was informed by the merchant that my employer's particular type of payment was not accepted. I paid for the purchase with my own cash.

When I got to the office, I did not explain myself well, but my first inclination was that I should hold the receipt for my tax purposes and give the employer a hand-written receipt for their tax purposes. But my employer told me they would keep the store receipt and that I would get the money in my paycheck or separate check (I forget which). I did not have time to think about it, and I did not object.

Now that I thought about it, I don't know standard business procedure for receiving expense reimbursements with regards to taxes. My general attitude is that all funds that I receive are seen by the IRS as income until I prove otherwise (usually via a receipt).

I would like to know the common or standard business procedures for employee expense reimbursement. I will be reieving a check from the employer with a row on the check stub for "expense reimbursement" or similar. Is this check stub sufficient proof for the IRS? The check stub would be the most ideal solution because it does not require me to maintain receipts, however I am not confident that it will.

The dollar amount is trivial, but I feel that I should know how to deal with this if I should find myself in a similar situation.

Edit: Suppose the amount had been $10,001. How does that effect proper record keeping from an employee's perspective. What is standard book-keeping procedure?

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In the normal course of events, you should receive a separate check for the amount of the purchase, and that amount should not be included in your wages as shown on your W-2 statement. If the amount is included on your paycheck, it should still be listed separately as a non-taxable item, not as part of wages paid. In other words, the IRS should not even be aware that this money was paid to you, there is no need to list the amount anywhere on your income tax return, and if you are paranoid about the matter, staple the stub attached to the reimbursement to a copy of your bank statement showing that you deposited the money into your account and save it in your file of tax papers for the year, just in case the IRS audits you and requires you to document every deposit in your checking account. The amount is a business expense that is deductible on your employer's tax return, and your employer is also required to keep documentation that the employee expense reimbursement plan is running as per IRS rules (i.e., the employer is not slipping money to you "under the table" as a reimbursement instead of paying you wages and thus avoiding the employer's share of FICA taxes etc) and that is why your employer needs the store receipt, not a hand-written note from you, to show the IRS if the IRS asks.

You said you paid with "your own cash" but in case this was not meant literally and you paid via credit card or debit card or check, then any mileage award, or points, or cash back for credit card use are yours to keep tax-free, and any interest charges (if you are carrying a revolving balance or paid through your HELOC) or overdraft or bounced check fees are yours to pay.

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    +1 - Exactly right. When I have business expenses that I charge, I submit a reimbursement request, send in my receipts (to my employer) and the amount I receive is sent to me separate from payroll. It's a direct deposit, and doesn't appear on my check stubs or W2. – JoeTaxpayer May 12 '12 at 15:43
  • Thank you for the answers. I used to be self employed, so I am mindful of all monies deposited into my accounts. I am fairly confident you folks are right. The purpose of the edit was to flag the IRS with a large deposit and see how that effects anyone's advice on record keeping (in addition to the ~second check / check stub). – John R May 12 '12 at 16:01
  • There is no issue at all if you got reimbursed by check (or EFT deposit into your checking account). In the highly unlikely event that your employer handed you $10,000.01 in cash, that is a different matter. See the answers and discussions following thereafter of this question. – Dilip Sarwate May 12 '12 at 16:08

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