What Is an Accountable Plan?
Under IRS rules, reimbursements are not taxable compensation if they meet three simple requirements:
- Business Connection The expense must be ordinary and necessary for the business.
- Substantiation The employee or owner must document the expense with receipts, mileage logs, dates, purpose, and amount.
- Return of Excess Any excess advance must be returned within a reasonable time.
If those three rules are satisfied, the reimbursement:
- Is not subject to income tax
- Is not subject to Social Security or Medicare tax
- Is not subject to FUTA
- Is not reported on Form W-2
Translation: no payroll tax shrapnel.
If those rules are ignored, the reimbursement becomes taxable wages. And the IRS does not debate that.
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