Do you have an accountable plan for employee reimbursements?
Accountable plans provide benefits both for the employer and its employees. But
they require planning to set up and effort to maintain. Here's what you need to
know about why you should make this effort and how to do so.
What Are Accountable Plans and Nonaccountable Plans?
Both accountable and nonaccountable plans refer to the means
by which employees are reimbursed for expenses they incur on their employer's
behalf. These expenses include things like buying last-minute office or job
supplies, using personal vehicles for company business, paying for travel
expenses, taking customers out for meals, or paying a fee for the
company.
Accountable plans require that the employee submit receipts
or another type of approved tracking method to account for all the money
submitted for reimbursement. Nonaccountable plans do not require tracking. That
money is usually given in the form of allowances - which the employee may or
may not return a portion of - given either on a regular basis or per
event.
How Do Accountable Plans Benefit Companies?
Accountable plans are extra work for the company, since
staff must follow IRS rules and reconcile what was given out versus receipts.
But the employer benefits because it discourages abuse of expense allowances.
When employees must return receipts, they are more likely to use the money
solely for what it was intended. This is a system of checks and balances that
prevents misuse as well as errors.
In addition, the employer has a reliable written record of
expenses. Ultimately, the company paid these expenses via the employee, so it
is responsible for ensuring that they are properly categorized and fit all IRS
rules to be deducted on income taxes. And customers can see where their money
is going should the company ever need to justify its invoices.
Finally, accountable systems ensure that staff members are
treated equally. When everyone from the CEO to accounting clerks must turn in
receipts or track their mileage, everyone has the same experience. There is
less resentment than there may be when unaccountable expense allowances are
handed out only to some but not the vast majority.
How Do Accountable Plans Benefit Employees?
Employees also benefit from accountable plans because they
reduce taxes. Under IRS rules, reimbursements through a nonaccountable plan are
deemed taxable wages or salary for the employee. This is added to their Form
W-2 each year and increases their tax bill. While the employee may have once
been able to deduct their expenses to offset this, current tax law doesn't
allow any deductions.
What Does an Accountable Plan Require?
If you want to set up an accountable plan, you will first
need to understand what makes a plan accountable and therefore tax-free to
employees. The rules can be somewhat complex, but they include the following
major areas:
- The
expense must be business-related and deductible by the employer. Partially
personal expenses must be divided.
- The
expense must be substantiated by the employee. This is generally done
through receipts or logging.
- Excess
money must be returned to the employer, usually between 30 and 120 days of
receipt.
Some types of expenses, such as mileage or per diem, have
their own unique rules and methods of tracking. Each employer would set up a
personalized standard for these.
Where Can You Get Help?
Clearly, the benefits of accountable reimbursement plans are
many. But your business must get the steps right in order to reap the rewards
both for employees and the company.
Start by learning more about reimbursement plans
in consultation with the accounting team at
Williams &
Associates Tax Services. We help our clients analyze their expenses and
processes to find the best way to maximize profit and minimize paperwork. Call
today to make an appointment.
