When employers reimburse employees for work-related expenses, the tax treatment of these payments depends on whether the reimbursement follows an accountable or non-accountable plan, as defined by the IRS. This distinction affects both employees and employers regarding tax obligations, payroll withholding, and recordkeeping.
Understanding Accountable and Non-accountable Plans
An accountable plan is an employer reimbursement arrangement that meets three IRS criteria: the expenses must relate to the business, employees must adequately substantiate expenses (usually with receipts or logs) within a reasonable time frame, and any excess reimbursement must be returned promptly. Reimbursements made under accountable plans are excluded from employees’ taxable wages.
By contrast, a non-accountable plan does not meet one or more of these requirements. Employers do not require expense substantiation or return of excess amounts. Consequently, reimbursements under non-accountable plans are treated as taxable wages subject to income and payroll taxes.
IRS Regulations and Business Implications
The IRS outlines the rules for these plans primarily in IRS Publication 535 (Business Expenses) and Notice 2018-74. Accountable plans help employers avoid paying payroll taxes on reimbursements and facilitate tax compliance for employees. Non-accountable plans are simpler administratively but come with additional tax costs for both parties.
For example, an employee who submits receipts for $150 in travel expenses and is reimbursed exactly $150 by the employer incurs no taxable income from this reimbursement. However, an employee receiving a flat $200 monthly reimbursement without proof is taxed on that amount as additional wages.
Practical Examples
| Scenario | Plan Type | Tax Consequence |
|---|---|---|
| Employee submits receipts and returns extra $50 | Accountable | Reimbursements are non-taxable |
| Employee receives flat amount, no receipts | Non-accountable | Amount added to wages and taxed |
| Employee fails to return excess under accountable plan | Non-accountable | Excess reimbursement taxed |
Who is Affected?
These reimbursement rules apply to all employees incurring and claiming work-related expenses. Employers select the plan type they implement and must comply with IRS regulations to maintain tax benefits. Independent contractors and freelancers typically deduct business expenses differently on their tax filings rather than use reimbursement plans.
Best Practices and Recommendations
- Employers are encouraged to use accountable plans to reduce payroll tax liabilities and maintain proper IRS compliance.
- Employees should keep detailed records, submit expense reports promptly, and return any excess reimbursements.
- Workers on non-accountable plans should prepare for higher tax withholding and understand that reimbursements count as taxable income.
- When changing from non-accountable to accountable plans, clear communication and policy updates are essential.
- Consult a tax professional or IRS resources for complex reimbursements.
Common Pitfalls
- Misunderstanding that all reimbursements are tax-free. Only those under accountable plans qualify.
- Missing deadlines to provide receipts or return excess money, causing reimbursements to become taxable.
- Employers failing to withhold taxes on non-accountable reimbursements risk IRS penalties.
- Assuming non-accountable plans are rare—they are legitimate but less tax-efficient.
FAQs
Can employers offer both accountable and non-accountable plans?
Yes, provided it is clearly documented which expenses fall under which plan.
What if I don’t return extra reimbursement under an accountable plan?
That excess reimbursement becomes taxable income, making the whole payment non-accountable.
Are meals and entertainment reimbursed under accountable plans?
Yes, when properly documented and business-related.
How long should I keep expense records?
The IRS recommends keeping documentation for at least three years for audit purposes.
For more detailed IRS guidance, visit the official IRS page on accountable plans at https://www.irs.gov/publications/p535.
This explanation helps employers and employees understand the proper tax treatment of reimbursed expenses and avoid surprises during tax season, ensuring compliance with IRS mandates.