Accountable Plan for Employee Reimbursements

If your business reimburses employees for business expenses, then we strongly suggest that you set up an accountable plan for these reimbursements. If the IRS were to question the expense reimbursement payments your business makes to employees and determine them to be compensation rather than expense reimbursement, they could require your business to pay payroll taxes on these reimbursements. An accountable plan would help reduce the ambiguity of such payments and the threat of reclassification. To be considered an accountable plan, your reimbursement arrangement must include the following rules:

  • Expenses reimbursed must have a business connection – employees must have paid or incurred deductible expenses while performing services as an employee of your business.
  • Employees must adequately account to you for expenses to be reimbursed within a reasonable period of time. This includes mileage for business travel by the employee using his or her personal vehicle.
  • Employees must return to you any excess reimbursement or allowance within a reasonable period of time.

We suggest having a standard reimbursement form for all employees to use for submitting to you for business expenses to be reimbursed. You can create one that is customized for your business or click here to download an Excel expense report template or you can find it on our website under the Client Forms section. Please contact us if you would like assistance with setting up an accountable plan.