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Employee Reimbursements in a California Payroll Tax Audit


One of the biggest problems that we come across in payroll audits is employee reimbursements. A lot of the times what will happen is an employee will get paid a normal paycheck and then they will spend their own money outside the context of the business to buy materials, to buy supplies, go post office do whatever. The business will write the employee a cheque out of their operating account and not run it through payroll.

As this progresses, and depending on the size of business and how often the employees are counted on to front their own expenses. You could have several large checks being issued to employees that on the surface would look like compensation. But you’re going to have to die then in order to find out whether they’re reimbursement. The biggest issue with these payments is whether or not the business can substantiate that there are a factor reimbursement.

A lot of businesses keep poor records, they don’t save the reimbursements. Once the employee has been paid out, the reimbursement is just simply verification for the owner so that the owner knows that the employee did actually incur those expenses. Once the issue’s been settled with the employee, they don’t think about keeping the substantiation. In those cases, it’s critically important to go back and try and classify as much information as you can as employee reimbursements.

You can rely on the testimony of the employee. You can talk about the materials that were purchased. You can try and obtain third-party invoicing through a third-party depending on what it is. But you will want to try and gather as much as you can about reimbursements ahead of time and/or try and screen that issue out of the audit that you’re dealing with. Casual labor, employee reimbursements are very critical.

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