Accountable versus Non-accountable Employee Reimbursement Plans and what does it mean?
We just had a client ask about whether business related expenses that are reimbursed to employees is considered taxable income or just a reimbursement and how to account for it. The difference is whether the employer chooses and accountable plan or a non-accountable plan.
To be an accountable plan the reimbursement or allowance arrangement must require your employees to meet the following three rules:
- They must have paid or incurred deductible expenses while performing services as your employees. The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. – Simple enough, only actual business expenses can be paid for. Plus the employee cannot be paid for something that is already included in their current pay.
- They must substantiate these expenses to you within a reasonable period of time. – The IRS goes on to say that 60 days it a good guideline for a reasonable period of time.
- They must return any amounts in excess of substantiated expenses within a reasonable period of time. – If they received more money than they can substantiate the remainder must be returned. The IRS says 120 days after the expenses were paid is a good guideline.
Any amounts paid with an accountable plan that meet the three requirements above are not considered wages. Since they are not wages they are not subject to withholding and payment of income, social security, medicare, and FUTA taxes. If any of the three above requirements are not met the reimbursement or allowance is considered income under a nonaccountable plan and are thus subject to income, social security, medicare, and FUTA taxes. Accountable plans are where the employees reimbursement would be considered non-taxable.
This is why most clients we work with require an expense report with receipts for all reimbursements. Without a receipt it is no longer considered a reimbursement under their accountable plan.
In a nonaccountable 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 nonaccountable payments if any of the following conditions are met
- Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation. – This is where employers have problems with employees. They have an accountable plan and their employees never seem to get the receipts turned in. Simply put if this is the case you can still pay them, but it will be considered wages. It then becomes the employees burden to offset these expenses on their personal tax return.
- You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not 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.
- You advance or pay an amount to your 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 of the money will be considered wages.
- You pay an amount as a reimbursement you would have otherwise paid as wages. – Not much to say here. You simply can’t pay a ‘reimbursement’ as a way to reduce to the taxable wages.
Nonaccountable plans are the simplest for the company to track. They simply get put in box 1 of the W-2 since they are counted as normal wages. However in this type of plan the employee must keep all business receipts so they can deduct these expenses on their personal taxes.
While there are some cases we have recommended clients use a nonaccountable plan, for the most part we believe reimbursement plans should be accountable. Even with the increased amount of record-keeping there are enough tax advantages for the employer and employee to utilize accountable plans.
Give us a call if you have this situation or if this just opened more questions.