If your employees pay for business expenses out of pocket, you’re probably reimbursing them… but are you doing it in a way that maximizes tax benefits for everyone involved?
We have good news! An accountable plan allows businesses to reimburse employees for business expenses without those reimbursements counting as taxable income.
Related: Is Mileage Reimbursement Considered Taxable Income?
Without an accountable plan, those reimbursements become taxable compensation subject to payroll taxes. This means higher tax bills for your employees and additional payroll tax costs for your business.
This article is meant to provide some general information. We recommend always consulting with a tax professional before making tax-related decisions.
What Is an Accountable Plan?
An accountable plan is simply a formal arrangement where businesses reimburse employees for business-related expenses they’ve paid to the employee personally. When done correctly, those reimbursements aren’t treated as wages and are excluded from the employee’s taxable income entirely.
This means no income tax for the employee, no payroll taxes for the employee or the business, and no W-2 reporting required. The business still gets to deduct the full amount as a business expense, creating a win-win situation that reduces overall tax liability.
The IRS doesn’t require you to file your accountable plan document with them, but you must have one and follow it consistently. Think of it as your internal company policy that demonstrates you’re reimbursing legitimate business expenses rather than providing disguised compensation.
Related: Mileage Reimbursement Explained | How To Set Up a Mileage Reimbursement Policy for Your Business
Why Do You Need an Accountable Plan?
Accountable plans aren’t complicated, and the tax savings can be huge. Whether you’re reimbursing home office expenses, mileage, travel costs, or cell phone bills, getting an accountable plan set up ensures everyone at your organization benefits.
Corporations and LLCs taxed as corporations benefit in particular since employees in those companies can’t claim home office deductions directly like sole proprietors can. Instead, they can reimburse employee-owners for home office costs through an accountable plan and deduct those expenses on the corporate tax return.
How Accountable Plans Differ from Non-Accountable Plans
The difference between accountable and non-accountable plans comes down to IRS compliance. If your employee reimbursement arrangement fails to meet the IRS’s three key requirements, it automatically becomes non-accountable, and that’s where tax problems arise.
Under a non-accountable plan, all reimbursements are treated as taxable wages. This means they’re subject to federal income tax, Social Security, Medicare, and unemployment taxes, plus they must be reported on the employee’s W-2.
From your business’s perspective, non-accountable reimbursements still generate a tax deduction, but you’re still paying the employer portion of payroll taxes on those amounts. More importantly, your employees are getting hit with unexpected tax bills on money they simply spent on behalf of the company.
These tax hits can be big. An employee receiving $10,000 in non-accountable reimbursements might owe $2,000-3,000 in additional taxes, depending on their tax bracket. Meanwhile, that same $10,000 under an accountable plan would generate zero additional tax liability for that employee.
Most businesses inadvertently operate with non-accountable plans simply because they don’t know the rules. They reimburse employees informally without proper documentation or established procedures, which triggers the unfavorable tax treatment, even if their intentions were good.
Related: Mileage Reimbursement Requirements By State | Which States Require Mileage Reimbursement?
Common Reimbursable Employee Expenses Under an Accountable Plan
Before you start setting up your accountable plan, it’s important to know which expenses qualify for accountable plan reimbursement. The most common reimbursements fall into a few easy to understand categories.
Here are few commons ones:
- Home office expenses
- Reimburse a percentage of rent, utilities, and related costs based on the office’s square footage used exclusively for business.
- Vehicle mileage reimbursement
- Track and reimburse miles using either the recommended IRS standard rate or a custom rate that works for your team.
- Cell phone and internet
- Reimburse the reasonable business-use percentage of your phone and internet bills, supported by consistent documentation.
- Travel and meal expenses
- Reimburse actual business-related travel, lodging, and meal costs. S corp owners must use actual meal receipts rather than per diem rates.
The key principle is that expenses must be mixed-use items paid personally by the employee, then reimbursed based on the business percentage. Items that are 100% business-related should be paid directly by the company, while 100% personal items shouldn’t involve the business at all.
What You Cannot Reimburse Under an Accountable Plan
Entertainment expenses including tickets to sporting events, theater performances, golf outings, and similar activities are not reimbursable, even if business is discussed. The 2017 Tax Cuts and Jobs Act eliminated these deductions entirely.
Personal expenses like gym memberships, personal subscriptions, haircuts, or regular commuting miles should never be included in your accountable plan. Unreasonable expenses can also create problems.
Related: Remote Work Expense Reimbursement Policy | Should Companies Reimburse Work From Home Expenses?
Claiming 95% business use on your phone or reimbursing luxury expenses that don’t align with your business can invite scrutiny. Keep reimbursements reasonable and well-documented.
How to Create and Manage Your Accountable Plan
You can find accountable plan templates online, or you can create your own. Your policy should specify reimbursable expenses, documentation requirements, submission deadlines, and the reimbursement process.
Require expense reports with date, amount, business purpose, and receipts submitted within 60 days, and keep all documentation for at least three years. Storing these documents digitally is becoming more common, making organization easy and accessible from anywhere.
For mileage, use automatic GPS tracking apps like TripLog rather than slowly tracking manually or painstakingly reconstructing logs later. Reimburse on a regular schedule (monthly or quarterly).
Reimburse your employees via checks, or transfer funds from your business account to the employee’s account. This creates a clear paper trail as well.
For owner-employees, reclassify shareholder distributions as reimbursements. If you took $20,000 in distributions but are owed $5,000 in reimbursements, reclassify $5,000 as accountable plan reimbursements.
For all of this, once again, it’s highly important to keep detailed documentation. If your plan fails the IRS’ requirements, reimbursements become taxable compensation, which can trigger penalties.
Related: What Do Most Businesses Pay for Mileage Reimbursement? | How Much To Reimburse Your Drivers’ Mileage
Accountable Plan FAQ
Q: Do I need to file my accountable plan with the IRS?
A: No, you don’t file the plan itself with the IRS. However, you must maintain written documentation of your plan and all reimbursements in case of an audit. The IRS will want to see that you had proper procedures in place and followed them consistently.
Q: Can sole proprietors and partnerships use accountable plans
A: No, as you cannot reimburse yourself since you’re not employees of a business. However, corporations and LLCs taxed as corporations can use accountable plans to reimburse employee-owners.
Q: What happens if I reimburse expenses without proper documentation?
A: The reimbursements will become taxable income to the employee and must be reported on their W-2. You’ll also face payroll tax obligations on those amounts, and the business deduction may be disallowed if you can’t prove the business purpose.
Accountable Plans Explained: In Conclusion
Accountable plans can give big tax benefits for both businesses and employees when implemented correctly. The key is understanding the three IRS requirements, maintaining proper documentation, and following consistent procedures throughout the year.
Set up your accountable plan now and use tools like TripLog to automate mileage tracking from day one! Create an account for your team or schedule a complimentary demo today!
