Reimbursing employees for business expenses should be straightforward. They spend money for work, you pay them back. That seems easy enough. When tax season comes around, though, it can create confusion, extra paperwork, or even tax surprises for both your business and your employees.
Many business owners wonder if they are handling reimbursements the right way. There is good news. The IRS has a clear, approved method for handling reimbursements without making them taxable for employees or your payroll. This is called an accountable plan.
What is an accountable plan?
An accountable plan lets you reimburse employees for legitimate business expenses without turning those payments into taxable income. Without this plan, those reimbursements count as taxable wages. Employees owe income tax on them. You owe more in payroll taxes.
With an accountable plan, valid reimbursements do not count as taxable income. Employees do not owe income tax. You do not owe payroll taxes. These amounts stay off the employee’s W-2. A plan also creates clarity for what expenses are covered and how to handle them. That helps avoid misunderstandings and audit risks.
How an accountable plan works
An accountable plan follows three simple IRS rules.
- Business Purpose: Expenses must have a clear business reason. Examples include meeting clients for coffee, using a personal car for work trips, or buying supplies for work.
- Documentation: Employees must turn in receipts, mileage logs, or other proof. They also need to explain what the expense was for. The IRS says 60 days is a reasonable deadline for submissions. Many businesses choose 30 days to keep things organized. If employees submit late, the reimbursement can become taxable income.
- Return Extra Funds: If an advance is larger than the actual expense, the employee must return the difference. Otherwise, the leftover money becomes taxable income.
What happens if you do not follow the rules or have no plan?
Without an accountable plan, reimbursements are treated as income. Employees pay income tax on them. You pay more in payroll taxes. End-of-year paperwork becomes more complicated. There is also more risk of an IRS audit.
With an accountable plan, reimbursements do not count as taxable income. Employees keep more of their pay. You pay less in taxes. Reporting stays clean and easy.
How to set up an accountable plan
You do not need a complex system. Here are the basics:
- Write a Simple Policy: State which expenses qualify, what proof is needed, and how soon employees must submit claims.
- Use a Tracking System: A spreadsheet works fine, or you can use an expense app. The key is to have clear records.
- Train Employees: Let them know what the plan covers and how to follow it. Keep your explanations clear and direct.
- Review Regularly: Look over expense submissions to make sure employees follow the rules. This helps keep everything on track.
Common mistakes to avoid
Even a simple plan can get messy if you skip steps. Avoid these common mistakes:
- Not having a written policy
- Forgetting to require receipts and explanations
- Letting employees wait too long to submit claims
- Reimbursing expenses that are not for business
Remember: A clear policy and careful tracking help avoid these problems.
Is an accountable plan worth it?
For most small businesses, yes. Setting up a plan takes a bit of effort at first. After that, it saves you money and confusion. It also makes it easier for employees to understand what is covered.
If you have been handling reimbursements informally, take a look at your process. Writing a simple policy and sticking to it can prevent a lot of future problems. A tax professional can help you make sure your plan follows the rules.
A clear accountable plan saves money, avoids headaches, and shows your employees you care about doing things right.
The bottom line
Look at how you handle expense reimbursements today. Write a clear policy and explain it to your team. Having an accountable plan in place means reimbursements stay fair, clear, and free from tax trouble for everyone.
