Most employees incur expenses to do their jobs. The employee might drive for their job or use their cell phone or home internet or maintain a home office. If you don’t reimburse your employee’s expenses, then the employee has no way to deduct those un-reimbursed expenses on their individual tax returns (those deductions go wasted). Instead, consider reducing your employee’s wage and replacing that reduction with a reimbursement. Example: If your employee earns $50,000 and incurs $5,000 of un-reimbursed expenses (driving, cell phone, internet, supplies, home office), then you pay FICA tax on $50,000 and your employee pays tax on $50,000 and can’t deduct their $5,000 of expenses. If you instead pay that employee $45,000 as a wage and $5,000 of reimbursement, then the employee is still making $50,000, but you pay FICA tax on $45,000 (save $383) and the employee pays tax on $45,000 instead of $50,000 (saving the employee around $1,200 of tax/year).
Accounting and Consulting