Accountable Plans: beneficial for employee & employer
Accountable plans allow employers to reimburse employees for job-related business expenses, tax free. Under an accountable plan, qualified reimbursements are not included in an employee’s wages or on the employee’s W2; employers don’t pay employment taxes on the reimbursement and can deduct it as a business expense. And while they aren’t new, accountable plans have become more important with the passage of the 2017 Tax Cuts & Jobs Act (TCJA), which suspended employees’ ability to deduct unreimbursed job-related expenses as itemized deductions on their personal tax returns for tax years 2018-2025. In the current tight job market, an accountable plan can be a great tool for hiring and retaining good employees, and employees aren’t saddled with business expenses that are not deductible.
What makes a plan accountable?
- The reimbursed expense must have a business connection. In other words, the employee incurred the expense while performing their job for the employer. Types of business expenses reimbursable to an employee could include travel, mileage, tools, business meals (@50%) and employee home office expenses.
- The reimbursed expense is substantiated. Generally, the employee must provide the employer with a receipt, as well as provide amount, date, time, place and business purpose of the expense, within a reasonable period of time (generally within 60 days after the expense is incurred or paid).
- The return of excess expense advances or unsubstantiated reimbursements is made to the employer within a reasonable period of time (generally within 120 days).
Although the IRS does not require a written accountable plan, distributing a documented accountable plan to your employees is a good idea. The tax rules applied to an accountable plan are on an employee-by-employee basis. If an employee fails to meet the accountable plan requirements, their reimbursements are included in taxable wages.
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Not interested in establishing an accountable plan? In that case, all employee expense reimbursements are taxable; the reimbursements must be included in the employee’s taxable wages, and employer payroll taxes will be assessed on the reimbursement.
No matter which plan you have, your local Payroll Vault can help you pay your employees and stay compliant. Call us today!
