With most expenses, the rules are simple. You pay the bill and deduct the expense when you file your tax return. However, when it comes to reimbursing your employees for meal expenses, the issue becomes a bit more complicated. Under the Internal Revenue Service's rules, the reimbursement may be taxable income for your employee, or it may be tax-exempt. The amount you reimburse your employee may not be the amount you may claim on your own taxes.
Basic Rules for Meal Expenses
The IRS defines two situations in which meals are deductible. The first requires travel outside of the tax home for business purposes. The second situation covers meals as entertainment related to your business. To deduct travel expenses, the trip must be completely or primarily for business reasons. If the trip combines business and personal travel, only the portion that is business-related is deductible. To claim an expense as business entertainment, the IRS requires you or your employee to discuss or conduct business during the meal with a reasonable expectation that the client will provide you with income in the future. You may reimburse the employee for the full cost of the meal, but you may only deduct half of the cost on your business income tax return. Include gratuities, parking fees or service charges directly related to the meal.
Employee Accounts for Meal Expense
If the employee accounts for his meal expenses, such as providing you with receipts and the reason for the expense, you may reimburse him in full. He must also return any unspent advance money you provided for his expenses. Do not include the reimbursement in his taxable wages. You may deduct 50 percent of the cost for income tax purposes.
Employee Does Not Account for Expenses
If your employee does not account for his expenses, reimburse him in full and include the reimbursement his taxable wages. These reimbursements are subject to income tax withholding and are subject to Social Security and Medicare taxes as well. Do not deduct these as meal expenses; instead, include them in your expenses for salaries and wages, which are 100 percent deductible.
"De Minimis" Amounts
De minimis benefits are those of such minimal value that it would be too impractical or unreasonable to account for them. For example, if you occasionally reimburse an employee for his dinner when he works late or reimburse a supervisor who purchased breakfast pastries for her group when it worked on the weekend, you may consider those to be de minimis meal expenses. Do not include the reimbursements in the employee's taxable wages. The IRS allows you to deduct these minimal payments in full, rather than limiting them to 50 percent like most other meal expenses.