Advisory Committee on Tax Exempt and Government Entities (ACT ...

Withholding RequirementsACCOUNTING RULES When to withhold depends on whether payments are made under an accountable ornonaccountable plan. Reg. $1.62-2(h)Under an Accountable PlanIf an employer has an accountable plan but an employee does not timely account for expensesor return excess amounts, the employer must withhold employment taxes no later than the firstpayroll period following the end of the reasonable period. Reg. $1.62-2(h)(2)(i)Under a Nonaccountable PlanIf advances and reimbursements are made under a nonaccountable plan, they are treated aswages and withholding is required when the advances or reimbursements are made to theemployee. Reg. $1.62-2(h)(4)(ii)Late Substantiation or Return of ExcessIf an employee substantiates expenses and returns excess advances after the employer hastreated amounts as a wage, the employer is not required to return any withholding or treatamounts as nontaxable. Reg. $1.62-2(h)(2)Travel AdvancesTo prevent a financial hardship to employees who will be traveling away from home onbusiness, employers will often provide advance payments to cover the costs incurred whiletraveling. There must be a reasonable timing relationship from when the advance is given tothe employee, when the travel occurs and when it is substantiated. There must also be arelationship between the size of the advance and the estimated expenses to be incurred.Accountable plan advancesTravel advances are not treated as wages and are not subject to income and employment taxeswhen they are paid under an accountable plan. They must be for travel expenses related to thebusiness of the employer, substantiated by the employee, and any excess returned in areasonable period of time. Reg. $1.62-2(c)(4)If an employee does not timely substantiate expenses or return excess advances, the advanceis includible in wages and subject to income and employment taxes no later than the firstpayroll period following the end of the reasonable period. Reg. $1.62-2(h)(2)