If an employee submits substantiation of all expenses for which reimbursement is requested, then the corresponding payment from the employer to the employee is not considered income to the employee. Substantiation can take the following forms:

• A receipt that clearly indicates the amount of the expense.

• Per diem rates that do not exceed the per diem rates listed in IRS Publication 1542, which itemizes per diems for a variety of locations throughout the country. If an acceptable per diem rate is used, then travel, meals, and entertainment expense receipts for those days do not have to be submitted. If an employee is traveling to or from the home office, then the IRS allows a per diem on travel days of up to three-fourths of the normal rate.

Health insurance costs, including expenses incurred for an employee's family, are not considered employee wages, but must be recorded as wages in Subchapter S corporations for those employees who own more than 2 percent of the business.

If an employee lives away from home for less than one year on company business, the living costs paid to the employee for this period are not considered taxable income. However, once the duration exceeds one year, the employee is considered to have permanently moved to the new location, rendering all such subsequent payments taxable income to the employee.

Such fringe benefits as tickets to entertainment events, free travel, and company cars should be recorded as employee gross income. The amount of incremental gross income added should be the fair market value of the fringe benefit, minus its cost to the employee, minus any deductions allowed by law.

Example. Brad Harvest obtains discounted season tickets to the local baseball team through his company. The market price for the tickets is $2,500, but he only pays his employer $750 for them. The difference of $1,750 is considered income to Mr. Harvest, and should be reported as such to the IRS.