4nannytaxes.com - Updates From The Nanny Tax Experts

Household Employees? Guidance on Reimbursement of Expenses

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Many families who expect a nanny or house manager to purchase items for the family provide a family credit card for the expenses – making tracking of the purchases easy and avoiding the need for expense reimbursement.

Others, however, request that the household staff simply pay for the odd trip to the grocery store, purchase of flowers, filling the gas tank or getting an oil change and other items and then have an expense reimbursement scheme either on a pay period or monthly basis.

The IRS recently issued revised guidance to employers (Sec. 62(c) (Rev. Rul. 2012-25)) to satisfy documentation and business connection requirements to make the reimbursement non-taxable (not included in employee taxable wages). Thse requirements apply to household employers as well as commercial enterprises.

Sec. 62(c) requires that all employees’ reimbursed expenses to be substantiated by the employee (house manager, nanny, etc.). In addition, the reimbursement must have a business connection, and clearly be an expense that an employee pays or incurs in connection with the employee’s performing services for the employer.

Particular attention is paid to mileage reimbursement. A flat “mileage allowance” is not permissible, rather a log that documents date, start and stop locations, mileage, and business purpose must be maintained in order to reimburse mileage on a tax free basis. The Microsoft website has a mileage log/reimbursement form available for download that works wonderfully.

It is the responsibility of the employer to require the proper documentation before any non-taxable expense reimbursement be made.

Do you have a “short cut” that helps you create this documentation on your job? Please share with readers below!