In contrast, employee expenses reimbursed under a nonaccountable plan are considered income to the employee and are subject to withholding. An accountable plan is a reimbursement or other expense allowance arrangement that satisfies three basic requirements: The requirements of an accountable plan are applied on an employee-by-employee basis. To satisfy the business connection component, the business expenses covered by the plan:
The way in which employers handle these reimbursements can produce significant tax savings for both the company and employees. A nonaccountable plan is a reimbursement that does not satisfy the requirements of an accountable.
Tax treatment under the two strategies If there is no accountable plan in place, then the company must report reimbursements as income to employees. If they are subject to the alternative minimum tax AMTthey lose all of the benefit because itemized deductions are not deductible for AMT purposes.
With an accountable plan, reimbursements are not reported as income so the employer avoids payroll taxes and W-2 reporting. The employer deducts the business expenses. The employee does not have any income to report and does not have any expenses to claim as miscellaneous itemized deductions.
Steps for creating and operating an accountable plan There is no IRS form used to adopt an accountable plan. The law does not even require that an accountable plan be in writing. However, formalities count when it comes to accountable plans. Corporations should add the adoption of accountable plans in their minutes.
It is most important to operate an accountable plan in accordance with its terms. Having a requirement to substantiate costs within 60 days is not enough.
If there is no substantiation, the plan will fail to be treated as an accountable plan, despite the written plan, and reimbursements will be treated as having been paid under a nonaccountable plan.
Once you know what employee reimbursements to track, you need to know the classifications they must meet in order to be compliant with an accountable employee reimbursement plan. One of these requirements is that the expense must have a business connection. Sample Accountable Plan for Business Expense Reimbursement Purpose: This document can be used as a guide to draft an accountable plan for expense reimbursements However, it is merely an example, and it is not meant to be adopted or adapted without consulting appropriate legal counsel. To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
For example, it can be used to reimburse employee driving on business at the IRS standard mileage rate 56 cents per mile in They can be used for other employee costs covered by the company. If employees are required to use their own tools for work, employers can cover the costs under an accountable plan.
Be sure that reimbursements are only for actual expenses.
If there is a flat small tool allowance, without regard to reimbursement or correlation to actual costs, this arrangement will fail from a tax perspective.
The reimbursements will be taxable and subject to payroll taxes. If employers require employees to work from home, they can reimburse employees for expenses, such as Internet access.
Again, the reimbursements must conform to accountable plan rules. Conclusion Using an accountable plan is a win-win for employers and employees. But things have to be done right.
Barbara Weltman Barbara Weltman is a tax and business attorney and the author of J. She has been named a Small Business Influencer for five years in a row. This website contains articles posted for informational and educational value.
Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex.
The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.Once you know what employee reimbursements to track, you need to know the classifications they must meet in order to be compliant with an accountable employee reimbursement plan.
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