Accountable Plans: What it is & What are the Benefits
An accountable plan is an IRS (Internal Revenue Service) arrangement in which employers reimburse employees for any out-of-pocket business expenses. Since these reimbursements are not counted as income, employees don’t need to pay any taxes on these payments.
Requirements of an Accountable Plan
Based on IRS rules, three key requirements for an accountable plan are:
- The expenditures must be directly connected to the business.
- Employees must provide proof of expenses within a reasonable time period. It typically involves submitting an expense report and proper substantiation in the form of receipts, invoices, or canceled checks.
- Employees must return excess reimbursement timely.
Employers don’t need to submit an accountable plan to the IRS, but you’ve to prove that expenses incurred were business-related at a tax audit. So, make sure you document all these transactions and make the requirements of the accountable plan a part of your employee policy.
Expenses Covered in an Accountable Plan (Approved by the IRS)
- Home office expenses
- Travel expenses
- Meal expenses
- Car expenses
- Training
- Phone and internet expenses
- Supplies and tool expenses
- Subscriptions, dues, and licensing fees
And more.
Important note: An accountable plan doesn’t cover all business-related expenses, including sporting events, entertainment, nightclubs, cocktail lounges, etc.
Benefits of an Accountable Plan
For employers:
Employers who follow an accountable plan pay fewer payroll taxes. Otherwise, reimbursements of business-related expenses are subject to payroll taxes. As a result, businesses end up paying additional social security tax, unemployment compensation, and Medicare tax.
For employees:
- Reimbursed for business-related expenses.
- No need to report unreimbursed business expenses when filing tax returns.
- Not taxed on these reimbursements as W-2 income.
As you see, accountable plans are highly beneficial for both business owners and workers. Most importantly, these are straightforward and have easy-to-meet compliance needs. So, start benefiting from this IRS arrangement and save on taxes.
