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Employee Allowances

Tool Allowances are Includible in Gross Income
               and Subject to Withholding

In a number of industries, employees provide their own
tools to perform services and are reimbursed for the cost
of the tools by their employers.  Whether or not such
amounts are included in the employee's income and wages
is governed generally by whether or not the employer
makes payments to the employee under an accountable
plan.  Expenses reimbursed under an accountable plan are
excluded from income and wages; expenses that are
reimbursed under a non-accountable plan are taxable.

In Rev. Rul.2005-52, the IRS clarifies that employers using
accountable plans to reimburse employees for the cost of
providing tools must substantiate the expenses reimbursed
and, to the extent the plan provides payments before
expenses are incurred, the plan must require the
employee  to return amounts in excess of the substantiated
expenses.  In particular, the ruling clarifies that an
accountable plan may not use estimates to substantiate
the amount of the expenses.

Therefore, any arrangement that is not an accountable
plan in which tool allowances are paid under the
arrangement must be included in the employees' gross
income, reported as wages on the employees' Forms W-2,
and are subject to withholding and payment of federal
employment taxes.

                       Auto Allowances

Auto Reimbursements to employees fall under the same
rules as tool allowances, arrangements.