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Many of our clients have been asking us questions about an accountable reimbursement plan. Although they have an idea about it being a plan for reimbursing employees’ business expenses, they were not very clear as to what it exactly means, what it includes, if they should make an effort to implement it and how to do so.
Let’s look at all the important information regarding an accountable reimbursement plan to answer all the queries you may have.
An accountable reimbursement plan is a process that follows the Internal Revenue Service (IRS) guidelines for reimbursing employees for business-related expenses, eliminating any taxation for employees as well as business. As per IRS guidelines, an accountable reimbursement plan must meet the following requirements:
When these 3 requirements are fulfilled, it is referred to as an accountable plan for reimbursements. You must communicate these guidelines to your employees and ensure compliance. Otherwise, these reimbursements are counted as (taxable) income to the reimbursed employee.
The IRS defines “reasonable time” for substantiation of expenses and return of excess reimbursements as below:
The common/appropriate business expenses that may be included in the accountable plan for reimbursements are:
The IRS mandates employees to submit actual receipts of all these expenses with the expense report unless the company uses a per diem plan in place of direct reimbursement. To know about the standardized per diem rates in the US, click here.
Since accountable plan reimbursements are NOT considered income, the employer avoids payroll taxes and W-2 reporting. The employer deducts the reimbursements as business expenses.
However, if any of the 3 requirements of an accountable plan (as mentioned in FAQ 1) are not met, the reimbursements are treated as paid under a nonaccountable plan, which is considered income. It is then reported on the employee’s Form W-2 and is subject to taxes.
Creating and implementing an accountable plan for reimbursements is extra work for companies. But there are several benefits of using an accountable plan:
Since employees are asked to submit original receipts for substantiation of expenses, they are more likely to use the money solely for what was intended. It is a system of checks that prevents misuse as well as errors.
It gives businesses an accurate, written account of the business expense data and allows finance managers to make better financial decisions.
When everyone must submit their receipts and travel expenses for claiming reimbursements, you provide the same experience to everyone in the organization.
It helps in saving taxes as the reimbursed amount is not counted as income of the employee. Moreover, businesses can show them as deductibles.
The IRS requires substantiation by the employee and maintenance of records by the employer. For substantiation, the IRS requires original receipts for any expense over $75. If a receipt is not provided, the reimbursement becomes taxable. Let’s understand this with examples:
EXAMPLE 1: Let’s say an employee spends $10 on her meal, then the substantiation would not require a receipt, but at the very least should state, “$10 lunch on 1/5/21” for keeping accountable reimbursement records for the company.
EXAMPLE 2: Let’s say an employee spends $150 on an online seminar that is business-related. In this case, the employee would be required to give evidence of payment via an email or original receipt of the seminar for substantiation and record purposes.
Ideally, every business owner should set up an accountable reimbursement plan for his or her business. If you’re a single-member LLC with no employees, then you don’t have to create one as all your business expenses are deductible as per the IRS.
However, as soon as you hire your first employee, it’s time to start creating an accountable plan so that it’s easier to show your business deductibles and save tax for the employees as well as your business.
The IRS does not require businesses to submit a written accountable plan. However, businesses must be able to demonstrate that they meet the requirements of an accountable plan if ever faced with an audit by the IRS.
Therefore, we suggest you always have a written plan in place that provides guidelines and requirements for expense reimbursements, making it easier for employees to understand and comply with.
Also, it will help keep a proper record of your employee’s expense report filings, return of excess amount, and reimbursements.
Let’s say your sales manager uses his or her car for business purposes and you reimburse them for the miles traveled. Let’s look at a mileage reimbursement claim that would fall under an accountable plan:
If you don’t have an accountable plan or don’t create it properly, then any reimbursements, even those that are ordinary and necessary, automatically become a part of the nonaccountable plan. This means they are subject to taxes and W2 reporting.
As per IRS Publication 15: “Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to the withholding and payment of income, social security, Medicare, and FUTA taxes.”
Therefore, we suggest you draft an accountable plan as it will likely save everyone’s time, money, and confusion related to expense reimbursements.
The benefits of having an accountable plan are many but only if you enforce it with all terms. If there is no substantiation within 60 days, you can’t treat the plan as an accountable plan. Consequently, the reimbursements will be treated as having been paid under a nonaccountable plan.
Having an advanced expense management solution may help you implement your accountable reimbursement plan effectively. It will ensure all reimbursements are received, reported, and maintained properly, within “reasonable time” as per IRS guidelines.
To know more about how you can implement your accountable reimbursement plan with ITILITE, schedule a free demo with our product expert today!