ACCOUNTABLE PLAN-IMPORTANT & SAVE TAXES!

When payments are made under an accountable plan, they’re free from federal income and employment taxes for recipient employees. This includes you as a business owner for the business expenses you need to be reimbursed for if you paid for them personally or used your personal vehicle for business purposes. The employer benefits because the reimbursements aren’t subject to the employer’s portion of federal employment taxes. When an employer pays an expense reimbursement or advances to an employee (regardless of whether the employee incurs or is reasonably expected to incur the expense), the IRS considers the arrangement to be disguised taxable compensation. Which means the purported expense reimbursement is treated as additional taxable compensation.

How an Accountable Plan Works

Accountable plans may include reimbursement for a number of different employee related expenses (which include you as the owner of the business), including: 

  • Business supplies/expenses/uniforms they bought with personal funds.
  • Employee business travel expenses, including travel meals
  • Business mileage costs for the business use of personal vehicles
  • Employee and/or business owner home office expenses (exclusive use for owners must be met) 

The accountable plan also must include a procedure requiring employees to return excess reimbursements (those in excess of allowable amounts) to the employer. If an employer sets up and maintains an accountable plan, employee travel expenses do not have to be treated as taxable income.

Allowable Plan Requirements

 Accountable plans must meet four requirements for payments to recipient employees to qualify as tax-favored expense reimbursements, rather than taxable compensation: see IRS website

  1. Business connection. Reimbursements or allowances can be paid only for expenses incurred by employees regarding performing services for the employer. A common example is business-related travel expenses. 
  2. Substantiation. Expenses must be substantiated by an expense report or similar record. Receipts should be required for expenses over $75. For lodging expenses, receipts are required regardless of the amount. An accountable plan can pay predetermined mileage or per-diem travel allowances up to the amounts paid to federal employees. Companies that opt for this simplified method don’t need their employees to substantiate actual expense amounts. 
  3. Return of excess payments. Within a reasonable period, employees must be required to return reimbursements or advances that exceed actual substantiated expenses. Under an exception, employees aren’t required to return excess mileage or per-diem travel allowances based on the amounts allowed to federal employees. 
  4. Reasonable time. Substantiation of expenses and the return of excess payments must occur within a reasonable period.

Please reach out to us if you are a client (or will be) and have not adopted a plan yet, email us or contact us HERE