Personal Charges on Company Credit Cards: Repay, W-2 or Write-Off

What happens when a personal charge lands on a company card?

A personal charge on a company or corporate card ends one of three ways: the cardholder repays it, it becomes taxable wages, or, for an owner, it becomes a distribution or a loan. It cannot be written off: a personal charge is never a business expense, and it cannot stay in an expense account.

The outcome depends on who holds the card, whether the company required repayment, and how fast the money came back. The time limits below were written for business-expense arrangements, not personal charges, so they are the closest yardstick and the facts of the card arrangement decide. A case is not simple when:

• several people hold cards, and owners and staff share one card program;
• personal charges were booked as meals, supplies or travel;
• W-2s or payroll returns were already filed;
• the charges run across more than one year.

Gather every card statement, the receipts, the card policy, the payroll reports and the filed W-2s before deciding anything.

When does a personal charge become wages on the employee's W-2?

A personal charge the company paid for an employee becomes taxable wages when it is not repaid in time (the yardstick is 120 days after the expense is paid or incurred; see below). IRS Publication 15-B says any fringe benefit is taxable unless the law excludes it, and the amount included is reduced by anything the employee paid for it. It also says the use of a charge card or credit card is never excludable as a minimal benefit, however small.

The W-2 instructions put taxable fringe benefits in box 1 and, where they apply, in boxes 3 and 5. Payroll treats the added amount as supplemental wages (Publication 15):

Add the amount to wages no later than the first payroll period after the time allowed to repay ends (Publication 15; 26 CFR 1.62-2(h)).

What keeps a repayment off the W-2: accountable plan rules and time limits?

A repayment can stay off the W-2 when the company's card arrangement meets the three accountable-plan rules and the money comes back within a reasonable period. The IRS writes those rules for business-expense reimbursements, so they are the closest published test. The rules: the amounts relate to business expenses, the employee documents them with a receipt and purpose (substantiates), and the employee returns any excess (Publication 15).

The regulation counts amounts charged to the company through credit card systems as part of the arrangement. A personal charge is not a business expense, so it cannot be substantiated. Read with the return-of-excess rule, it is an amount above the substantiated business expenses that the employee must return. A safe harbor is a time limit the regulation treats as reasonable. The safe-harbor periods that matter for a card charge:

These are safe harbors. A reasonable period depends on the facts (Publication 15; 26 CFR 1.62-2(g)). An amount not returned in time is treated as paid under a nonaccountable plan, and it is wages.

Repaid after that period? The safe harbor no longer applies and the facts decide. The sources cited here do not say whether a late repayment undoes wages already due, so have it reviewed before the W-2 is filed.

Two traps:

• No repayment rule. If the arrangement does not require substantiation and return of excess, the regulation treats all amounts paid under it as nonaccountable, not just the personal ones. For business-expense reimbursements, a later voluntary repayment does not convert them (Publication 463); how that applies to a personal charge is a question of facts.
• A pattern. The safe harbors are unavailable for any year in which the company has a plan or practice of paying employees more than they substantiate to avoid reporting and withholding. A pattern of abuse makes every payment nonaccountable (26 CFR 1.62-2(g)(3) and (k)).

If the employee repays in time, how is it booked?

A personal charge repaid in time is a receivable from the employee, not an expense. Record it as due from the employee when the charge posts, and clear it when the repayment arrives.

The payroll run that adds the wages records the withholding and the employer's payroll taxes. Repayment can be a check, a transfer or, where state wage law allows it, a payroll deduction. For card payments and monthly reconciliation, see credit card payments in the books.

What changes when the cardholder is an S corporation owner?

An S corporation owner who is an officer or other employee is covered by the wage rules above, and has two more outcomes: a distribution or a loan. The IRS says it can reclassify payments to a shareholder-employee from distributions to wages (IRS). The Form 1120-S instructions say payments to a corporate officer must be treated as wages to the extent they are reasonable pay for services.

• Repay or wages: the same treatment as an employee.
• Distribution: not wages, but its tax depends on the owner's stock basis, which it lowers (section 1367), and on whether the corporation has accumulated earnings and profits (section 1368). Where there are other shareholders, a payment for one owner alone must also be given appropriate tax effect under the one-class-of-stock rules (26 CFR 1.1361-1(l)(2)).
• Loan: the owner repays the corporation under written terms. Whether it counts as a real loan is a question of facts; see borrowing from your own corporation and the S corporation guide below.

For the sorting and the entries, see S corporation paying personal expenses and recording S corporation distributions.

What changes when the owner is in a C corporation?

When a C corporation pays an owner's personal bill and it is neither repaid nor a real loan, the payment is either pay for services or a distribution to a shareholder. A distribution is a dividend to the extent of the corporation's earnings and profits (its current-year and accumulated profits, figured for tax purposes). The rest reduces the owner's stock basis, and any excess over basis is gain (section 301; section 316).

A distribution is not pay for services, so the corporation has no compensation deduction for it. Which treatment fits depends on the facts. See C corporation paying owner expenses, including how a dividend is reported on Form 1099-DIV.

Can the corporation deduct personal charges it paid?

No. The corporation cannot deduct a personal charge as a business expense. Section 262 allows no deduction for personal, living or family expenses. Section 162 allows ordinary and necessary business expenses, including a reasonable allowance for pay for services actually rendered.

A charge booked as meals, supplies or travel loses that deduction. A charge added to wages can be deducted as pay if total pay is reasonable for the services. A repaid charge, a distribution or a loan produces no deduction.

How do I review company cards at year-end and sort business from personal?

Go through every card statement for the year, charge by charge, and label each one business or personal before deciding who owes what. Publication 463 says an employee must account for amounts charged to the employer by credit card, with the records the IRS would expect for a deduction.

1. Pull the statements for every company card and cardholder.
2. Label each charge business, personal or unclear. Split a mixed charge; only the personal part is personal. Ask the cardholder for the receipt and the business purpose of anything unclear.
3. Total the personal charges by cardholder and note which cardholders are owners.
4. For each personal charge, find out whether and when it was repaid, counting days from the charge date.
5. Sort what is unpaid: staff amounts go to wages; owner amounts go to wages, a distribution or a loan.
6. Find where each personal charge was booked and move it out of meals, supplies or travel.
7. Check what was already filed: the W-2s, the payroll returns and the business tax return for each year affected.

What card policy keeps personal charges from recurring?

A card policy that follows the accountable-plan rules says who gets a card, what it may be used for, when charges are reported and when personal charges are repaid.

A routine of leaving personal charges unrepaid and off the W-2 can fall under the pattern rule above if it is a plan or practice to avoid reporting and withholding. Revenue Ruling 2003-106 involved a different setup: employees marked each card charge personal or business and were personally liable to the card company, and the employer reimbursed only business charges on an approved expense report. It does not address personal charges that a company paid and then collected back.

What if W-2s or payroll returns were already filed without the charges?

The wages are due no later than the first payroll after the time allowed to repay ended (26 CFR 1.62-2(h)). The quarter of that payroll decides the correction:

• Its Form 941 is already filed: file Form 941-X, one form for each quarter (employers who file Form 944 use Form 944-X for the year). If that year's W-2 is also filed, add Form W-2c (Form 941-X instructions; W-2 instructions).
• Its Form 941 is not filed yet, or the time allowed has not ended: add the wages no later than that first payroll. They go on that quarter's Form 941 and on the W-2 for the year of the payroll that includes them.

A correction is generally free of interest and late-payment and late-deposit penalties if Form 941-X is filed by the due date of the Form 941 for the quarter in which you find the error (the last day of the first month after each quarter) and the tax is paid by the time you file. Tax a filer knowingly underreported is excluded (Form 941-X instructions).

For a prior year, Form 941-X generally cannot correct federal income tax withholding for a payment that was not treated as taxable. The wages must still be corrected on Form 941-X and Form W-2c (Form 941-X instructions). The employee's income for that year changes too. A business return that deducted the charges as expenses needs its own review.

Who pays. The company owes tax it did not withhold. It can make it up from the employee's later pay if state wage law allows, income tax only by the last day of the calendar year (Publication 15). Once the employee has paid income tax on the wages, section 3402(d) bars collecting that tax from the company, though not penalties: the employee completes Form 4669 and the company files Form 4670 (Form 4670 instructions). Owners or officers responsible for the withholding can be personally liable for unpaid withheld tax: the trust fund recovery penalty is 100% of it for those who acted willfully, and the IRS generally has 3 years to assess (section 6672; Publication 15). See trust fund recovery penalty.

Fixing a payroll mistake covers the correction steps.

Example

These examples are illustrative; the amounts are in US dollars.

An employee repays in time

A non-owner charges US$400 of groceries to the company card in March. The card policy requires personal charges to be repaid, and the employee repays US$400 within 20 days. The company books US$400 as due from the employee and clears it on repayment. Nothing goes on the W-2 and nothing is deducted. If the US$400 were still unpaid 120 days after the charge, the company can treat it as wages and add it in the first payroll after that.

An S corporation owner-employee

A year-end review finds US$6,000 of personal charges on the card of the S corporation's only shareholder.

• Repay it in time: the receivable clears and nothing reaches the W-2. If the time to repay has already run, it is the late-repayment question above.
• Add it to wages: W-2 box 1 rises by US$6,000. If the owner's total wages, including this amount, stay under the Social Security wage base, each side owes about US$459 of Social Security and Medicare tax, plus income tax withholding.
• Treat it as a distribution: it lowers stock basis and any excess over basis is gain. If the owner's regular pay is below reasonable pay for the work, the IRS can reclassify it as wages.
• Treat it as a loan: with a written note and repayment terms, and only if the facts support a real loan. The small-loan exception to imputed interest can apply at this size.

The charges were booked as expenses

The same US$6,000 sits in meals (US$4,000) and supplies (US$2,000). Those deductions come out of the books. If the amount becomes wages, it moves to wages expense. If payroll returns are already filed, the wage choice means a Form 941-X for each filed quarter the wages belong in, and a Form W-2c if that year's W-2 is filed too. The business return that deducted the meals and supplies needs a look.

Different for you?

• The review finds personal spending across several cardholders, some of it booked as expenses or in filed returns: gather the statements, receipts, card policy, payroll reports and filed W-2s, then get bookkeeping help to settle who repays, what goes through payroll, what is a distribution or loan, and what filings need correction.
• Charges run across several years or the card balances do not tie: start with the bookkeeping cleanup checklist, then get bookkeeping help.
• Only an S corporation owner took the spending: see S corporation paying personal expenses.
• You own a C corporation: see C corporation paying owner expenses.
• The spending was a real business cost the owner paid personally: see reimbursing owner expenses and business expenses on a personal credit card.
• The owner lives outside the US or is not a US citizen or resident: a distribution to a foreign owner can require US withholding and reporting (Publication 515), and an S corporation cannot have a nonresident alien shareholder (section 1361(b)(1)(C)). Review it with cross-border tax help and bookkeeping help.
• You own an LLC taxed as a sole proprietorship or partnership, or you are a sole proprietor: this page covers corporations; see personal expenses paid from the business account and fixing commingled business and personal funds.
• Your state restricts wage deductions or taxes the wages: federal treatment does not settle the state result. Check your state agency's rules, and bring the findings to bookkeeping help if the books need to change.