Like any for-profit business, nonprofits typically encounter instances where they must reimburse a staff member or volunteer. Anytime your organization has to do this, there are some special circumstances and accounting protocols to keep in mind. In this article, we'll discuss everything you need to know about a nonprofit reimbursement policy.
Can a nonprofit reimburse expenses?
Your nonprofit’s events include many expenses. At times, staff and volunteers may end up covering travel, events, and even administrative costs. To plan for these expenses, you must have a nonprofit reimbursement policy as part of your nonprofit accounting practices.
This article will discuss how to craft a nonprofit reimbursement policy and the best practices to avoid financial and legal risks.
Nonprofit expenses range from office items and equipment to plane tickets and Uber ride fees. In an ideal world, you’ll be there to pay for each item with a business credit card, but the ideal is rarely the case when it comes to nonprofit finances.
Many times, you’ll rely on other staff, board members, or volunteers to temporarily cover these costs. It’s not if, but when, this will happen. Any expenses you reimburse must cover your organization’s purpose.
Below is a list of products and services your expenses can include:
Your nonprofit must be prepared with a policy that covers how to address these payments following Internal Revenue Service (IRS) guidelines.
Nonprofits do not have to pay taxes on business expenses, and you can issue non-taxable reimbursements. While nonprofits don’t have to report reimbursements on their payroll taxes, you must include receipts, invoices, and other financial paperwork from the staff member or volunteer.
Your reimbursement policy must also include a reminder that volunteers and staff must seek reimbursement within 60 days of making the purchase.
If your nonprofit provides funds to the employee or volunteer to cover costs, any excess funds must be returned to your organization within 120 days, along with the invoice or receipt.
At the end of your fiscal year, your organization must report all expenses on IRS Tax Form 990.
The IRS makes that process even more accessible with rules it provides on IRS Publication 463. These rules include reporting procedures, deductible expenses, and expense reports.
Reimbursement policies should not be too difficult, but you’ll want to follow a few best practices to prevent potential financial and legal risks.
Nonprofits expecting to regularly reimburse staff or volunteers should have an accountable plan. According to the IRS, you must follow several regulations to have an accountable plan.
Non-accountable plan reimbursements are any payments that don’t follow the accountable plan. Employees receiving reimbursements under a non-accountable plan must pay taxes on the reimbursement.
Nonprofits must include this reimbursement on the employee’s W2 form and withhold income tax and the employee’s share of Social Security and Medicaid taxes. Employers must also pay a 7.65% share of the employee’s Social Security and Medicare taxes on the payments.
Employers can pay non-accountable plan reimbursements through wages, paid advances, direct reimbursements, credit card charges, and direct employer billing.
Any reimbursement made to independent contractor directors must be under a non-accountable plan. Any income over $600 to these directors must be reported to the IRS by the nonprofit.
In many cases, your nonprofit will have an accountable plan for some volunteers and staff and non-accountable reimbursements for others.
Nonprofits do not have to turn in reimbursement forms to the IRS, but it is good practice to create a reimbursement form that includes the following details:
It is advisable to have this form online. You may use Google Forms to create one that can easily be shared with your staff, volunteers, and board members. It’s also easy for you to check the response easily.
If your nonprofit is reimbursing someone for mileage, you must include IRS federal reimbursement rate guidelines to ensure staff and volunteers know what to expect. The standard mileage rate is $0.56 for business purposes and $0.14 per mile for charities.
Employees and board members can receive the business rate. Volunteers receive the charity rate but can also receive reimbursement for commuting to the nonprofit and its event location. This rate changes each year, so be sure to keep your policy up to date.
Current IRS rules allow a per diem rate of 100% on certain business meals until 2023. You can find additional per diem rates listed by state on the US General Services Administration website.
Sometimes, your nonprofit may give employees a cash advance to cover business costs. This is especially true when sending an employee on a business trip.
After a purchase or trip ends, the IRS requires the employee to return excess funds to the nonprofit within 120 days. If that amount is not returned in 120 days, the amount is now gross income and will be taxed.
As you can see, the IRS has detailed requirements for nonprofit reimbursements. These details also include a few exemptions. In very few cases, nonprofits do not have to report reimbursements or provide proof. They include –
Nonprofits will need to reimburse staff or volunteers for events, administrative expenses, travel costs, and more. The IRS has done an excellent job informing organizations on what information and proof they must collect and how to report these expenses.
Creating a nonprofit reimbursement policy will always keep your staff, board members, and volunteers informed. They will know what to expect and any deadlines by when to report expenses, etc. It will also help your organization file its nonprofit tax returns.
We’ve provided several other articles to address nonprofit budgets, accounting software, and more. You’ll find them all on the Donorbox Nonprofit Blog. Subscribe to our newsletter to have the best of our resources in your inbox every month.
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Disclaimer: By sharing this information we do not intend to provide legal, tax, or accounting advice, or to address specific situations. The above article is intended to provide generalized financial and legal information designed to educate a broad segment of the public. Please consult with your legal or tax advisor to supplement and verify what you learn here.
Kristine Ensor is a freelance writer with over a decade of experience working with local and international nonprofits. As a nonprofit professional she has specialized in fundraising, marketing, event planning, volunteer management, and board development.
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Kristine Ensor