Taxability of Payments
For any type of payment, we will always look at the IRS accountable plan rules for payments and other IRS considerations for taxability, and the support documentation.
- All payments are considered taxable by the IRS unless there is a specific exclusion in the tax code for a reduced or non-taxable treatment.
- If there is not good substantiation for what the payment is for, i.e. no description for payment, the purpose for payment or back up documentation, we will deem the payment as taxable and reportable (1099-MISC, 1042-S, W-2, etc.).
- Payments to International persons, who are nonresidents, are required to have 30% tax withholding from the payment unless there is a specific exclusion in the tax code for a reduced or non-taxable treatment.
Every payment is looked at for what type of payment it is per the Purdue definitions here, based on IRS guidelines.
- Any service/work component
- Any pay for attending a workshop/conference, etc.
- Any pay for an award where the person has entered a contest/competition where the payment is based on merit (travel award) or chance (prize)
- Any item that is called a “reimbursement”
A “true” reimbursement that is tax-free must have these three components. If a reimbursement does not have all three components, it is a taxable reimbursement, even if the person paid the expense.
The IRS accountable rules for tax-free treatment of employee reimbursements (travel and non-travel) have to have all three of these components:
- A business connection, largely for the benefit of Purdue University, not the person
- Documentation for the expense, i.e. receipts, MapQuest for mileage
- AND submitted in a timely manner according to the employee's requirements (Purdue University is 120 days)
- If reimbursement was submitted more than 120 days past the end of the event, the reimbursement does not qualify as a tax-free reimbursement.
- If a reimbursement did not have all three components, it is a taxable reimbursement.
Many reimbursements, like moving expenses (allowances or reimbursements), are ALL taxable because of the 2018 Tax Cuts and Jobs Act changes, so this is also not a tax –free reimbursement. See IRS Publication 521.