Tax rules regarding employee expenses?


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I'm reposting this from the Accounting thread to see if I have better luck getting a response:

My contractor husband has recently hired one employee. Normally they work out of state and the customers pick up the travel and meal expenses. The employee has been working within 17 miles of his home and our home office. My husband has issued a credit card to the employee for gas and meals and allows him to use it when in town, then my husband pays the credit card charges the employee made. (If he had been out of town our customers would reimburse on an expense report)

It's my contention, as the bookkeeper, that the lunches and gasoline are not tax deductible for employer or employee, and if the employee paid out of pocket and was reimbursed by my husband, it would be taxable income for the employee and a payroll expense for the employer. Right or wrong??

How is this situation handled in compliance with IRS rules?

Thanks in advance.
 
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