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An odd way to reimburse
February 1, 2011 7:48 AM   Subscribe

Strange (to me) accounting practice for a work benefit. Is what my company doing legal?

My company offers, as a benefit to me, quarterly reimbursement for my gym membership. But it's odd to me the way it's carried out. I pay for my gym out of pocket, then submit my expenses at the end of the quarter. However, rather than reimburse me directly for the money, the figure is rolled back into my gross income the following month, and subject to the taxation that the rest of my income is.

I suppose, on balance, I still end up with a net benefit. But the double taxation angle just doesn't feel right. I'm not an accountant, so my feelings could be entirely unjustified. I can even understand how there may be some reason to roll it back into the paycheck as benefit, rather than a payout. It just seems weird to be taxed on it again, and not entirely above board.

Is this a normal practice? Or am I right to feel uneasy about it?
posted by anonymous to Work & Money (18 answers total)
 
But the double taxation angle just doesn't feel right.

How are you being "double taxed?" Paying for your gym membership would be considered a fringe benefit.
Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it.
posted by muddgirl at 7:54 AM on February 1, 2011


How are you being taxed twice? As far as I can tell, you're being given a bonus equal to the cost of a gym membership.

If they were doing it post-tax, it'd definitely be illegal, as health clubs are not a tax-deductible expense. This seems slightly odd, but is probably the only legal way to do it without the employer paying your gym membership directly.

(I'm not a tax accountant, but I do manage my own finances. This isn't raising any huge red flags in my mind)
posted by schmod at 7:56 AM on February 1, 2011


Fringe benefits such as gym memberships are generally taxable.
posted by dfriedman at 7:57 AM on February 1, 2011


It just seems weird to be taxed on it again, and not entirely above board.

I don't know the accounting details of whether they are doing it right or not, but I don't think you are being taxed twice if I'm reading it correctly. To simplify let's say your monthly paycheck is $100 and your gym membership is $10 per month.

Month 1: Receive $100 (minus taxes), pay $10 to gym.
Month 2: Receive $110 (minus taxes), pay $10 to gym.
...
Month X: Receive $110 (minus taxes), stop paying gym.

Overall you have received an extra $10 per month gross which you have used to pay for the gym, although as with any kind of income you are taxed on it. The first month you do use money from your regular paycheck rather than the extra reimbursement money, but that is evened out by the last month where you get the final reimbursement. At any rate you are only being taxed once.
posted by burnmp3s at 8:00 AM on February 1, 2011


As a slight additional gloss here, fringe benefits are treated as additional compensation for tax purposes. If you pay $100/month for your gym and that is fully reimbursed by your employer, the tax law views this as if you got a $100 raise--and that delta is run through payroll (subject to all the normal withholdings) like the rest of your paycheck.
posted by Admiral Haddock at 8:07 AM on February 1, 2011


Just wanted to jump in and say something. I'm not entirely sure, but I think the OP meant "getting taxed twice" because he/she is paying for the gym out of his own money (which comes from his income, which is taxed) and then getting reimbursed out of his income again, which is taxed again. Not sure if that counts as being double-taxed, but I think that's what the OP was getting at.
posted by LaurenIpsum at 8:13 AM on February 1, 2011 [1 favorite]


Essentially, the company can not fully reimburse an employee for the cost of the gym. They can reimbursing them for the cost of the gym minus the taxes they owe on that benefit. If they reimbursed employees the full cost without taking out any taxes, the employees would still have to pay that money to the IRS at the end of the year.
posted by muddgirl at 8:23 AM on February 1, 2011 [1 favorite]


I agree with LaurenIpsum. I think the OP would feel more comfortable with the situation if the company adjusted the increase in the gross income by the amount being taxed. For instance, if the OP is being taxed say 30%, then when they submitted the receipt for the membership which cost X, the company bumped the gross pay by 1.3*X.
posted by cali59 at 8:43 AM on February 1, 2011


However, rather than reimburse me directly for the money, the figure is rolled back into my gross income the following month

It doesn't matter whether they cut you a separate check (or even reimburse you in cash) for the gym membership, or simply add it in to your next regular paycheck. Either way, it's taxable income. Either way, it's going to be included on line 1 ("Wages, tips, other compensation") of your W-2 at the end of the year. If your employer makes a separate payment to you for the gym membership, that amount still has to be counted in your taxable income at the end of the year. If your employer pays the gym directly, that's still taxable income. Regardless of how it's done, the math works out the same. You're not being doubly taxed.

I think the OP would feel more comfortable with the situation if the company adjusted the increase in the gross income by the amount being taxed. For instance, if the OP is being taxed say 30%, then when they submitted the receipt for the membership which cost X, the company bumped the gross pay by 1.3*X.

Well, sure, we'd all like more money. The employer is free to provide him with a $100/month gym membership and a $30/month raise to offset the taxes on the membership, if they want to. (Actually $43/month, since the raise itself is taxable income too.) But that's not required.
posted by DevilsAdvocate at 9:14 AM on February 1, 2011


It helps to get rid of the paid-then-reimbursed part. Let's say the company paid for the membership directly, they'd pay $100 and that'd count as a $100 bonus. Then you'd have to pay $10 or whatever on taxes for that $100, even though you don't end up with any cash in hand, just with a gym membership.

Alternatively, as it is right now, you buy your $100 gym membership, get a $100 'bonus', then pay $10 in taxes on the bonus and the cash comes out the same - you're still paying income tax on the membership value.

You basically have to think of it as a highly discounted gym membership, not a free one.
posted by Lady Li at 9:16 AM on February 1, 2011 [1 favorite]


What LaurenIpsum and cali59 are describing is sometimes called "grossing up," and is common practice for, for example, executives receiving a benefit that is taxable but for which the company wants to reimburse fully. Like health plan premiums for an individual who is not permitted by IRS rules to participate in the company's cafeteria plan.
posted by Pax at 10:48 AM on February 1, 2011


Yet another question where we don't know which country the OP is in, and we have to assume the USA?
posted by AmbroseChapel at 3:15 PM on February 1, 2011


Yes, we don't know what country the OP is in. No, we don't have to assume the USA. If you have the answer which would apply in a different country, AC, go ahead and post it.
posted by DevilsAdvocate at 3:28 PM on February 1, 2011


I think the confusion is just which month it comes from. If you received $110 the first month and used the $10 to pay for the gym, then it would seem like you only paid taxes once. Your employer is just a month behind.
posted by lab.beetle at 3:38 PM on February 1, 2011


To me the OP is just wondering why this isn't considered a business expense that you get directly reimbursed for. For example, when I've travel for business and pay out of pocket I've typically just gotten directly reimbursed (I assume because there's no direct benefit to me?). Same is true when I work late in the office and order dinner on the company (I typically pay and get cut a direct check a few weeks later.)

I think the distinction the OP may have been looking for is: 'direct personal benefit' versus 'reimbursement of business expenses incurred by an individual'. The former is taxable as a fringe benefit while the latter is not.
posted by jourman2 at 9:13 PM on February 1, 2011


*traveled and *paid
posted by jourman2 at 9:14 PM on February 1, 2011


Found some more detail in this IRS doc (check out pages 7-8)

Accountable Plan
An accountable plan is an allowance or reimbursement policy (not necessarily a written plan)
under which amounts are nontaxable to the recipient if the following requirements are met:
7 • There must be a business connection to the expenditure.
• There must be adequate accounting by the recipient within a reasonable period of
time.
• Excess reimbursements or advances must be returned within a reasonable period of
time. IRC §62(c)
posted by jourman2 at 9:20 PM on February 1, 2011


Sorry, brain fart again. This doc.
posted by jourman2 at 9:20 PM on February 1, 2011


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