Understand reimbursement rules — and stress the importance of compliance
Your nonprofit's employees or volunteers likely have business-related expenses, such as mileage, meal or travel expenses. In the U.S., reimbursing these expenses without following certain procedures can be costly. Here are the basics on best practices for expense reimbursement.
Why should nonprofits use accountable plans for reimbursing expenses?
If you use what the IRS calls an "accountable plan" for reimbursement, your nonprofit won't have to pay payroll taxes on the reimbursements or report the payments to the IRS. In addition, the employee or volunteer won't have to include the payments in his or her taxable income.
To qualify as an accountable plan:
- Expenses must be related to your nonprofit
- The employee or volunteer must account for the expenses within 60 days of incurring the expense
- The employee or volunteer must return any excess reimbursement no more than 120 days after receipt
These rules are aimed at preventing employees and volunteers from seeking reimbursement for personal, rather than business, expenses.
How should expenses be documented under an accountable plan?
Proper documentation is essential for expenses to be reimbursable under an accountable plan. Provide employees and volunteers with a standard expense reimbursement form to be used each time expenses are submitted for reimbursement. The form should answer these questions:
- Who incurred the expense? Issue payment to this person.
- What was purchased? Require original receipts or invoices that describe what was bought, ideally including the name and address of the vendor. If travel is involved, require detailed descriptions of each element, such as mileage to and from the destination. If the expenses include a meal, ask for a list of everyone who shared the meal.
- When and where did the expense occur? Use original receipts or invoices to confirm the dates and places involved.
- What was the business purpose of the expense? Require a brief description of how the expense relates to your nonprofit's work.
What happens when nonprofits don't use an accountable plan?
If your nonprofit reimburses employees or volunteers for expenses through a fixed amount, such as an allowance or stipend, without requiring documentation, the reimbursements are considered nonaccountable by the IRS.
- The payments must be included on the employee's W-2 form and reported as income on the employee's tax return
- The employee's income taxes and Social Security and Medicare taxes must be withheld from the payments
- Your nonprofit must pay the employer's share of the employee's Social Security and Medicare taxes on the payments
If your organization doesn't use an accountable plan, you're able to reimburse expenses that exceed the IRS time limit. However, these payments are still considered taxable.
What's the most effective way to set reimbursement rates?
To keep expenses under control, your nonprofit might opt to set a per diem rate for meals and incidentals. It's often simplest to look to the federal per diem rate, which varies by geographic area and travel destination. Similarly, the U.S. General Accountability Office (GAO) sets an annual mileage reimbursement rate.
If you adopt reimbursement rates, be sure to clarify to your employees and volunteers what's covered. The GAO has a per diem rate that covers just meals and incidentals, such as taxis, and another rate that covers meals, incidentals and lodging. If your nonprofit pays more per diem or for mileage than the federal rate, the excess amount might be taxable.
What are some other best practices for expense reimbursement?
Make sure your expense reimbursement policy establishes:
- How to book travel. Have you designated one employee to make travel arrangements for everyone, or does the responsibility fall to an external travel agency or the travelling employees themselves? Some organizations allow employees to make their own travel arrangements to gain airline, hotel or other travel rewards for personal use.
- How to pay expenses to be eligible for reimbursement. Should employees use a personal credit card, a company-issued credit card or a supervisor's company-issued credit card?
- The approval process. When must expenses be submitted and when are approval decisions made? What's the turnaround time to receive reimbursement?
- Regularly scheduled audits. Are the audits intended to support budget management and fraud and loss protection, or to test specific controls and processes?
Creating expense reimbursement policies can be confusing. If you have questions, ask your attorney or tax adviser for help. Then, share the rules with your employees and volunteers — and stress the importance of compliance.
MissionBox editorial content is offered as guidance only, and is not meant, nor should it be construed as, a replacement for certified, professional expertise.
Nolo: Reimbursing your nonprofit's employee and director expenses by Stephen Fishman
Nolo: Reimbursing volunteers for their expenses: Set up an accountable plan by Stephen Fishman
NorthStar Nonprofit Institute: Accountable reimbursement plans for nonprofits by Blair C. Diaz and Deborah A. Stanford (2011)
Certify, Inc.: T&E policy: 10 best practices to eradicate inefficiencies that impact the bottom line by Ernie Humphrey (2015)