Many employees incur expenses as part of performing their jobs. These may include items such as meals, lodging, and transportation costs associated with business-related travel. How a company’s reimbursement policy is set up can have a significant tax impact on both the employer and its employees, so implementing the right strategy can provide simplicity and cost savings
In general, employees can receive reimbursements/allowances under two types of reimbursement plans: Accountable and Nonaccountable. A reimbursement policy is considered an Accountable plan if all of the following conditions are met:
- The employee’s expenses must be incurred while performing services as an employee of the company
- The employee must be able to adequately account for these expenses within a reasonable period of time to the employer
- The employee must return any excess reimbursement within a reasonable period of time
A Nonaccountable plan is a reimbursement policy that does not meet all of the above requirements.
Reimbursements paid under an Accountable plan are not treated as income to the employee and are not shown on their W-2. The company deducts the expenses as business expenses and the employee has no resulting business expenses to claim as miscellaneous itemized deductions on their individual tax return.
Conversely, reimbursements paid under a Nonaccountable plan are considered income to the employee and must be included as wages on their W-2, subject to withholdings. The employer must pay payroll tax on that income and the employee can claim these business expenses as miscellaneous itemized deductions on their individual tax return.
Selecting the Right Approach
Accountable reimbursement plans are the most common approach used by government contractors, including sole proprietors, who can take a deduction on their corporate tax returns. Although there are no IRS forms required to implement an Accountable plan, the terms of the plan should be documented in writing with sufficient detail. This detail would include the types of expenses that can be reimbursed, the timeframe for return of excess reimbursements, etc. in order to provide clarity and consistency as the plan is implemented and used.
While digital record-keeping supports efficiency around the expense tracking necessary for Accountable reimbursement plans, some companies may still select a Nonaccountable plan if they or their employees are unable to meet the requirements of the Accountable plan.
Which plan is appropriate for your business? Contact Linda Lo at (703) 847-4432 or firstname.lastname@example.org to learn more about reimbursement plans.