How to Set Up an Accountable Plan for Expense Reimbursements
Many business owners and their employees pay business expenses with personal funds. While employers aren't legally required to reimburse employees for business expenses (unless paying those expenses drops their pay below minimum wage, it's common practice. In fact, most employees expect to be compensated for the out-of-pocket costs they incur on behalf of the company.
Establishing an accountable plan allows you to reimburse employees, owners and shareholders for those expenses—potentially even home office expenses—in a tax-advantaged way for both parties.
This article covers what an accountable plan is, the benefits of having one, and tips for setting yours up.
What Is an Accountable Plan for Expense Reimbursements?
An accountable plan is a type of reimbursement arrangement designed to cover legitimate business expenses employees incur.
Essentially, an accountable plan is a policy requiring employees to substantiate their business-related expenses within a reasonable timeframe and refund any excess advances within a reasonable period.
Benefits of Establishing an Accountable Plan
As long as expense reimbursements follow the Internal Revenue Service (IRS) guidelines for accountable plans, they aren't considered taxable income to the employee or subject to employment taxes. This offers several benefits for both employers and employees.
1. Lower payroll taxes for employers. Employers reimbursing employees under an accountable plan reduce their payroll tax burden because the reimbursements aren't subject to the employer's share of payroll taxes, including FICA and federal and state unemployment taxes.
2. Lower income and payroll taxes for employees. The reimbursement doesn't have to be included on the employee's W-2, so it's not subject to payroll tax withholding.
3. Employees don't have unreimbursed business expenses. In the past, employees could claim unreimbursed work expenses as itemized deductions. However, the Tax Cuts and Jobs Act eliminated that deduction, so employees wouldn't benefit from deducting them anyway.
4. Tax deductions for employers. The company can claim reimbursed expenses as a deductible business expense on its income tax returns.
5. Home office deductions for S Corp shareholders. S corporation shareholders can't claim the home office deduction as owners of other pass-through businesses can. However, with an accountable plan, the company can reimburse shareholders for the cost of maintaining a home office. This allows shareholders to receive tax-free distributions, and the company deducts those expenses on the corporate return.
Tips for Setting Up an Accountable Plan
Ensuring you set up your accountable plan correctly to comply with IRS regulations is crucial. Here are some tips on setting up an accountable plan to get the most out of expense reimbursements while staying within the rules.
Set up a policy
While an accountable plan doesn't have to be in writing, it's a good idea to put your policy in writing to clearly outline the eligibility requirements and documentation needed to receive employee reimbursements. This will help employees understand what types of expenses are eligible and how they should document them.
Your accountable plan rules should clarify:
The timeline for employees to submit expenses (within 60 days from the date of the expense)
The process for requesting reimbursement (typically expense reports and receipts—paper or digital)
The process for returning any excess reimbursement or allowance within a reasonable period (within 120 days from the date of paying or incurring the expense)
The types of costs that are reimbursable (expenses must have a business connection)
The maximum amount for certain expenses
Designate an administrator
Once you've established the accountable plan, you should designate a staff member to manage the accountable plan. This person will review expense reports and verify documentation before reimbursing employees.
Ideally, a second person with management responsibility will be responsible for approving expense reimbursements. This ensures separation of duties and helps prevent opportunities for employees in charge of expense reimbursement to commit fraud.
Keep detailed records
It's essential to keep detailed records of all transactions related to the accountable plan. This includes receipts, other documentation, and records of when reimbursements were made. Keeping detailed records will help protect you from potential audit risks.
Consider using apps to help with compliance
Several applications can help with your accountable plan paperwork, approvals, and documentation requirements. These apps can allow you to set auto-approval rules and integrate with your accounting software to make paying employees and documenting tax deductions easier.
An accountable plan can be a great way to reduce the tax burden for both employer and employee while streamlining the process of tracking and administering expense reimbursements. By setting up your plan correctly and requiring proper documentation before reimbursing employees, you will be well on your way to establishing a successful accountable plan.
If you have any questions or want more information about setting up an accountable plan for employee expense reimbursements, schedule a call with Slate. We're happy to help you draft your written accountable plan policy and select the right technology to make administering your plan easy.