Employee expenses can create a tax burden for both a small business and its employees. But a relatively simple switch can help turn this problem into a tax reduction strategy for both parties instead. What is this change? It's known as an accountable plan. Here's what you need to know.
What Is an Accountable Plan?
There are two ways to reimburse employees for expenses they incur in the course of their duties to your business. The first is a nonaccountable plan, which basically provides an allowance for employees to use (such as on a business trip) without having to turn in receipts or records. The employee generally keeps what they don't spend.
The second, an IRS accountable plan, requires that employees turn in proof of payment for what they want to be reimbursed. If they are given an advance payment to cover expenses, the excess over what is reported to the employer must be returned.
How Does an Accountable Plan Reduce Taxes?
Accountable plans reduce taxes because they aren't reported as taxable income. The amount paid to an employee under this type of arrangement is not included in Form W-2 at the end of each year — no matter how much it might add up to. This is in contrast to a nonaccountable plan, where expense checks must be reported as part of their compensation.
The accountable plan also helps you as the employer because expenses paid under its guidelines are deductible by the company from its own taxes. You're also able to deduct the normal expenses of administrating this plan, such as accounting labor and recordkeeping. It could even reduce other company costs, like operating a company vehicle rather than using personal ones with mileage reimbursement.
What Should You Include In an Accountable Plan?
Many expenses can be reimbursed to employees under an accountable plan. This includes travel expenses (including meals), purchase of tools, home office costs, dues, uniforms, and miscellaneous supplies they may need for the work. One of the most common expenses is mileage. To report reimbursable mileage, the employee would track the date and destinations of trips, mileage used, and the reason for the trip.
Where Can You Learn More?
Want to know more about using accountable plans to reduce your small business tax and help employees? Start by consulting with an IRS tax reduction planning professional in your area. They will help you understand how to avoid unnecessary taxation while staying within the IRS rules. Make an appointment today to get started.
