If you reimburse your employees for business expenses, an accountable plan is a must-have. The reimbursements like the mileage reimbursement are not counted as income. Therefore, the reimbursements will not be subject to tax withholding or reported as income on Form W-2. The Internal Revenue Service has strict regulations for reimbursing employees for their occurring business expenses.
With an accountable plan, as an employer, you will be able to keep track of reimbursements. Unlike non-accountable plans, accountable plans are not subject to taxation since reimbursements aren’t exactly income. At times, the reimbursed cost is going to be considered non-accountable.
In this case, the “reimbursement” will be subject to taxation. This can happen due to expenses that are not related to business. If there are any excess funds though, it will be returned within 120 days.
Accountable Plan Requirements
The most important requirement for an accountable plan is expenses must be business-related. If you’re reimbursing employees for their mileage expenses, this is perfectly fine as long as the employee keeps track of the miles driven.
But same with any other reimbursement, the expenses must occur within the course of employment. Any expense that is between personal and business, then the expense needs to be divided between the employee and employer.
Any reimbursement the employer makes that is to cover business-related expenses can qualify. This can also include per diem. However, the same as any other reimbursement, it must follow the IRS regulations. As long as it fits the IRS regulations, the following can be included in an accountable plan.
- Employee travel expenses with meals (per diem)
- Tool and equipment purchases
- Home office expenses for the employee
- Mileage reimbursements
- Subscriptions and dues
Also, if you laid off any employee, you can reimburse their job search expenses. You can include it in an accountable plan as well.
Another requirement is that employees must return excess reimbursements within a specific time frame. This is 120 days as mentioned above. For example, assume you are reimbursing employees for 100 miles which totals at $57.5. If the employee has driven less than that for business purposes, the excess must be returned.
*Business mileage rate per mile driven: 57.5 cents