Does your organization reimburse staff and volunteers for expenses they incur while conducting business or traveling on behalf of the organization? If so, you’ll want to have a clear written policy for paying or reimbursing those expenses.
Under IRS guidelines, nonprofits may have either an accountable or nonaccountable arrangement for reimbursements. An accountable plan requires the recipient to properly account for the actual expenses incurred. As long as the plan meets all of the IRS requirements, you don’t have to include the expense payments in your employee’s gross income (or report them as income to a volunteer). An accountable plan also benefits your organization, because you won’t have to pay the employer’s share of any payroll taxes that otherwise would be due on the payments.
If the nonprofit has a nonaccountable plan — that is, one that fails to meet each of the requirements for an accountable plan — then all amounts advanced to the employee or volunteer are includable in his or her gross income and subject to both income and payroll taxes.
Accountable Plan Requirements
Reimbursements have to meet three basic requirements for an arrangement to qualify as an accountable plan.
- The expense must be related to your nonprofit activities and must be reasonable.
- The recipient must provide adequate documentation or accounting within a reasonable period of time after the expense is incurred.
- If you pay an advance on expenses, the person must return any unused or unsubstantiated amount to your organization within a reasonable period.
The IRS generally considers 60 days after an expense is paid or incurred to be a reasonable period for an employee or volunteer to substantiate an expense. Excess reimbursements should be returned to your organization within 120 days. Alternatively, you may provide employees and volunteers with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.
We can answer any questions you may have about reimbursement requirements. Please contact Warady & Davis LLP at (847) 267-9600.