Hiring Employees

Employee Business Expense (Accountable/Non-Accountable Reimbursements Plans)

A reimbursement or allowance arrangement is a system by which you substantiate and pay the advances, reimbursements, and charges for you employees' business expenses. How you report a reimbursement or allowance amount depends on whether it is an accountable or a non-accountable plan.

Accountable plan: To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules.

1) They must have paid or incurred deductible expenses while performing services as your employees.

2) The must adequately account to you for these expenses within a reasonable period of time.

3) They must return any amounts in excess of expenses within a reasonable period of time.

Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of social security, Medicare, and federal unemployment taxes.

Non-accountable plan: Payments to your employees for travel and other necessary expenses of your business under a non-accountable plan are wages and subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. Your payments are treated as paid under a non-accountable plan if:

1) Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, or

2) You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses.

Table 16-1 Reporting Reimbursements

Important References:

Publication 15                               Circular E, Employers Tax Guide
Publication 535                             Business Expenses
Form 1040 Schedule C line 24   Profit or Loss from Business
Form 1120                                     U.S. Corporation Income Tax Return