Employee Reimbursements-Accountable vs Non-Accountable Plans

As a tax preparer and payroll provider for my clients I always recommend, whenever possible, that they keep employee reimbursements’ out of payroll. The IRS even suggest this in Publication 583 (https://www.irs.gov/pub/irs-pdf/p583.pdf).  If it is your habit to include reimbursed expenses in employee paychecks and  your payroll is ever audited, be it from the IRS or the State, I am sure you and your employer could be very unhappy.

IRS AuditIn a perfect world, all expenses would be paid with company checks, or credit cards, leaving a clear path for accounting to identify the source and business reason for each expense. However, we do not live in a perfect world, and it is oftentimes necessary for employees to pay for these expenses.

Reimbursements are not so cut and dry.

If you give your employee/s money, pay or reimbursements, it is taxable. In order for the reimbursements to be tax exempt, they must be paid under what’s known as an “accountable plan,” and the reimbursements must meet certain criteria.

What I am getting at here The IRS says, “You can generally deduct the amount you pay or reimburse employees for business expenses incurred for your business. However, your deduction may be limited”.

If you make the payment under an accountable plan, deduct it in the category of the expense paid. If you make the payment under a non-accountable plan, deduct it as wages and include it in the employee’s Form W-2, (https://www.irs.gov/publications/p535/ch02.html#en_US_2012_publink1000208686).

In another note they tell us –

“Supplemental wages are wage payments to an employee that are not regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, and payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a non-accountable plan.”

Avoiding paying unnecessary taxes on employee reimbursements involves keeping detailed and accurate records separating out how much your business spends on different types of expenses.

In addition to keeping these amounts separate from your payroll numbers, it is important to maintain an ongoing tally of the amounts you have spent providing reimbursements to employees, breaking down these expenditures into categories such as supplies or auto expense in order to understand the ways that your business allocates its operating expenses.

Reimbursements under an accountable plan, do not typically appear on IRS Form W-2 as part of pay.