As an employer, there are times when employees may need to be reimbursed for expenses related to travel, meals, continuing education and other expense types (not including health insurance).
The method of documenting these reimbursements can have a significant impact on the tax treatment of these reimbursements. Under current IRS rules, there are two ways to reimburse employees for these types of expenses – an accountable plan and a nonaccountable plan.
A nonaccountable plan is considered income to the employee and is subject to federal withholding. This includes flat-dollar allowances, cents-per-mile reimbursements that exceed IRS standards, and advances.
The advantage of this plan is that it reduces the record-keeping responsibility and simplifies the administrative procedure. However, an employer who is reimbursing an employee under this plan must report the amounts paid as wages on the employee’s W-2 Form and the reimbursements are also subject to payroll taxes. For this reason, most employers generally stay away from this type of plan.
An accountable plan is a reimbursement or other expense allowance arrangement that is not considered income to the employee for federal income tax purposes. The reimbursed amounts are excluded from the employee’s gross income, are not reported as wages or other compensation on the employee’s Form W-2, and are exempt from the withholding and payment of employment taxes. This plan may be ideal for small businesses that do not have many and/or regular employee reimbursement expenses.
In order to be considered an accountable plan, an expense reimbursement plan must meet three requirements and if it does not satisfy one or more of these, it is treated as a nonaccountable plan.
These requirements include the following: