Using petty cash is a convenient way to make small purchases or reimbursements, but it is prone to accounting errors.
Rules for the Cash
Establishing a petty cash fund does not mean that the money in the pot is an expense. Rather, the cash is an asset just like a bank account and thus must be subject to similar controls.
Accounting for Petty Cash
The petty cash custodian should periodically total the receipts and determine the amount of petty cash spent on each category of expense. Someone other than the petty cash custodian should occasionally verify this.
Providing reimbursement to employees requires you to have an accountable plan under rules of the Internal Revenue Service (IRS). Reimbursements under an accountable plan are not considered income to employees. As a result, they are not subject to payroll taxes. Instead, the expenses are simply recorded as if the business had paid them directly instead of reimbursing employees for them.
The requirements for an accountable plan with the IRS are that the expense reimbursed must be reasonable and have a business connection, that there must be reasonable accounting for the expenses and that employees must return any advances in excess of their actual expense amounts within a reasonable time.
Employers that fail to account for reimbursements risk having all reimbursements considered wages.