Many companies start out, and get pretty far down the road, using the “per diem” approach when reimbursing employees for lodging, meals and incidental expenses. Doing so involves the use of either IRS tables or a simplified high-low method to reimburse workers up to specified limits.
The per diem approach is relatively simple and doesn’t involve too much record keeping. But it also puts businesses at risk if they exceed the per diem limits, exposing them to IRS penalties and employees to higher tax liability. For this reason, companies often reach a point where they create an “accountable plan” for handling employee expense reimbursements.
Reaping the tax advantages
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. The primary advantage is that your business can deduct expenses (subject to a 50% limit for meals and entertainment), and employees can usually exclude 100% of advances or reimbursements from their incomes. Workers whose jobs involve frequent travel may realize significant tax savings.
Qualifying for eligibility
To qualify as “accountable” under IRS rules, your plan must meet the following criteria:
- It must pay expenses that would otherwise be deductible by the employee.
- Payments must be for “ordinary and necessary” business expenses such as airfare and lodging charges.
- Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
- Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income and employment taxes — though potentially deductible by the employee.
The Bottom Line
Accountable plans take time to establish and require meticulous record keeping. Let us help. We’d be happy to assist you in setting up your accountable plan and regularly reviewing its compliance with IRS rules.