To determine which reimbursement plan is suited for your company, you should understand how the plans are defined, the requirements and the advantages and disadvantages.

Accountable Plan – commonly associated with Expense Reports

To be an Accountable plan, the reimbursement must require the Employee to meet the following three criteria:

  • The Employee must have paid or incurred deductible expenses while performing services as your Employees.
    • Only actual business expenses can be reimbursed.
    • Also, the Employee cannot be reimbursed for something that is already included in their current pay.
  • The Employee must substantiate these expenses to you within a reasonable period.
    • Per the IRS within 60 days is a good guideline for a reasonable period.
  • The Employee must return any amounts more than substantiated expenses within a reasonable period.
    • If the Employee received more money than they can substantiate the remainder must be returned.
    • Per the IRS within 120 days after the expenses were paid is a good guideline.

In an Accountable plan the reimbursement would be considered non-taxable to the Employee.  The expenses reimbursed in the Accountable Plan are not considered wages and are not subject to withholding and payment of income, social security, Medicare, and FUTA taxes.  However, if any of the three above requirements are not met, the reimbursement or allowance is considered income and are thus subject to applicable taxes.

Therefore, most clients require the Employee to provide an expense report with receipts for all reimbursements.  Without a receipt, it is no longer considered a reimbursement under their Accountable plan.

Non-Accountable Plan
– commonly associated with “Allowances”

In a Non-Accountable plan, all payments to Employees for travel and other business expenses are considered wages.  These wages are considered supplemental wages and subject to income, social security, Medicare, and FUTA taxes.  The IRS says payments are considered Non-Accountable payments if any of the following conditions are met:

  • The Employee is not required to or does not substantiate timely those expenses to the Employer with receipts or other documentation.
    • The Employer can reimburse or establish an allowance without substantiation of the expense from the
      Employee.  It then becomes the Employees burden to offset these expenses on their personal tax return.
  • The Employer advances an amount to the Employee for business expenses and the Employee isn’t required to or doesn’t return timely any amount he/she doesn’t use for business expenses.
    • Again, if the Employee does not get the expense report and receipts substantiating all expenses this will be treated as taxable wages.
  • The Employer advances or pays an amount to the Employee regardless of whether you reasonably expect the Employee to have business expenses related to your business.
    • Some businesses will give a full per diem during all trips knowing it will not all be used, but also not expected unused money back.  In this case, all the money will be considered wages.
  • The Employer pays an amount as a reimbursement that would have otherwise been paid as wages.
    • A ‘reimbursement’ cannot be paid to reduce to the taxable wages.

Non-Accountable plans are the simplest for the company to track.  They are put in box 1 of the W-2 and are considered as normal wages.  However, in this type of plan, it is recommended the Employee keep all business receipts as they may be able to deduct this on their personal tax return.

Advantages – Disadvantages???

  Employer Employee
Accountable Plan ·   Expense reimbursement deductible

·   Will not incur additional payroll taxes

·   Requires more documentation

·   Reimbursement not taxable

·   Must keep records and track expenses

·   Submit to Employer per company requirements

Non-Accountable Plan ·   Simplified

·   Fully deductible

·   Advance or Allowance added to Employee W-2

·   Will pay more in payroll tax

·   Increases taxable income

·   Must keep records and track expenses

·   May be able to deduct on personal tax return

For Employers to determine this in further detail, look at Publication 15 (2011), (Circular E), Employer’s Tax Guide.  Section 5 has the information about wages and other compensation.

After reading through this if you still have questions, please feel free to contact us.

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