The Comptroller's Corner will present typical University situations and the issues involved.
This scenario involves Independent Contractor Expense Reimbursements
As part of the negotiated amount to perform services for the University, an Independent Contractor (Consultant) asks for a fee for services and "expense reimbursement". The department and Procurement agree and a purchase order is issued, but only the fee is encumbered. The independent contractor then submits an invoice and their original receipts to the department for payment at the completion of the assignment. The department authorizes payment for the invoice and creates a Check Request to reimburse the independent contractor for their travel expenses, using object code 6240 - out-of-state travel.
Issue: If the University allows the payment of the consultant's travel expenses under object code 6240, then we are treating the payments as nontaxable under the "accountable plan" which is only applicable to our employees.
The proper treatment should be to reimburse the expenses under object code 3230. This would allow the University to report the entire amount of the payments to the consultant on IRS Tax Form 1099.
Optimally, the department and consultant should submit an estimate of the expenses to be reimbursed as part of the total amount to be paid to the consultant, so that the amount can be encumbered. The department should ask the consultant to list their expenses on the invoice and provide "copies" of their original receipts as support for the amounts. The department can validate the expenses and submit the invoice for payment against the encumbrance, and the consultant would retain their original receipts and use them as expenses incurred in the operation of a business to reduce their taxable income.
A faculty member accepts a position at the University to begin in August, but asks for a "pre-house-hunting" trip to be paid by the University as part of his/her package. The department agrees and writes the request into the employment contract.
Issue: Only the physical relocation of the faculty member's household goods falls within the permissible qualified expenses for moving. Thus, anything outside of this would be considered nonqualified and taxable to the individual.
In this case, the entire pre-house-hunting trip is taxable and reportable to the employee. Our current procedures call for the reimbursement to be made at the time the employee is placed on payroll. This way, the entire amount can be added to the paycheck and have employment taxes deducted from the reimbursement.
If the employee cannot wait until they are placed on the regular payroll based on their start date, there is a way to place them on the payroll early, so that the reimbursement may be processed before the start date of the employee. Contact FSO Payroll Operations for the procedures http://www.fso.arizona.edu/Payroll/.
A prospective candidate asks the interviewing committee if he/she may bring their spouse and children with them on their interview visit. The Committee Chairman responds that it would be fine and that they will reimburse for ALL the expenses of the candidates visit. The business reason for the reimbursement is that the University wishes to attract the candidate and the decision would involve the spouse.
Issue: While it may be considered a valid business expense by the departmental representatives, only the portion of the expenses directly related to the candidate are reimbursable under the "accountable plan" as tax-free. All of the expenses incurred on behalf of the spouse and children are considered taxable to the beneficiary, in this case, the candidate.
This problem demonstrates the difference between a qualified (nontaxable) and a nonqualified (taxable) transaction. In this case, the processing of the reimbursement will generate a 1099 to the recipient. The candidate will receive a check for the entire amount of the expense reimbursement request, but will also receive a 1099 in January to include the nonqualified reimbursement as taxable income.
The process for payment requires the department to split the expenses on the check request and list which are for the candidate and which are for the spouse and children.
Unless the department explains this to the candidate, the candidate may be confused when they receive the 1099 in January and wonder why the University has reported taxable income to the IRS.
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