New IRS Guidance on Employee
Tool Allowances
Do you provide tools
to your employees, or do you expect your employees to provide their own?
Companies that ask employees to arrive on the job with their own tools
sometimes decide to reimburse their employees for the cost of the tools.
Making the reimbursements under an accountable plan can provide tax
benefits.
Expenses that are reimbursed under an accountable plan that meets IRS requirements are income-tax free to employees and are not subject to withholding or payroll taxes. Your company deducts the payments as a business expense. If the accountable plan requirements are not met, the reimbursements must be included in your employees’ gross wages—and your company will incur the associated payroll tax costs.
To satisfy the accountable plan requirements, a tool allowance plan must meet all three of the following conditions:
There must be a business connection. The reimbursed expenses must be for tools your employees need and use on the job.
Your employees must adequately account to you for each expense within a reasonable period.
Any amounts in excess of the substantiated expenses must be returned to your company within a reasonable period.
IRS Issues New Ruling
The IRS recently issued a new ruling on tool allowances that clarifies
certain aspects of the accountable plan regulations. The IRS noted that not
all tool plans are the same and that the facts of a plan should be reviewed
to determine if it satisfies all of the accountable plan requirements. When
implementing a tool allowance plan, employers should not simply continue to
pay employees the same amount as before, splitting the amount into two
portions—one treated as wages and the other as a nontaxable reimbursement
for tool expenses. This wouldn’t meet the requirements because employees
would continue to receive the same gross pay, including the amount
designated as a tool allowance, without regard to whether the tool expenses
were (or are reasonably expected to be) incurred. In addition, employers
should be careful to require that employees submit documentation of their
expenses.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
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Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com