by Evie Alvarez
*adapted from The Tax Book - 2011 Tax Year

Executive Summary

An accountable employee reimbursement plan allows employers to reimburse their employees without having to add that amount to the employee’s income. It also allows the employer to expense the purchases, as allowable. However, certain guidelines must be followed in order to ensure that the reimbursements are allowable.

Why have an accountable plan?

The main benefit of an accountable plan (versus a nonaccountable plan) is that the reimbursement amounts are tax-exempt for the employee receiving the reimbursement. If the plan is nonaccountable, then the amounts are taxable income for the employee receiving the reimbursement.

Qualifications of an Accountable Plan

Employees must:
-          Have paid or incurred deductible expenses while performing services as an employee
-          Adequately account to the employer for these expenses within a reasonable period of time
-          Return any excess reimbursement or allowance within a reasonable period of time

Reasonable Period of Time

There is some variation, according the facts and circumstances of the situation, as to what qualifies as a reasonable period of time.  Following is a list of reasonable time frames:
-          The employer reimburses an expense within 30 days of the time the employee incurred the expense
-          The employee adequately accounts for the expense within 60 days after the expense was paid or incurred.
-          The employee returns an excess reimbursement within 120 days after the expense was paid or incurred.
-          The employer gives the employee a periodic statement, at least quarterly, that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the date of the statement.

Advanced Allowance

If the employer decides to pay the employer in advance of the employer actually incurring the expenses, the following requirements must also be met (in addition to the qualifications for an accountable plan):
-          Reasonable calculation of the allowance amount is done so as not to exceed the amount of anticipated expenses.
-          The employer makes the advance within a reasonable period of time.

Per Diem Option

Instead of an amount-specific reimbursement, an employer may choose to set-up a per diem allowance for travel, lodging, meals and incidentals. This could be based upon travel days, miles, or another fixed allowance. For rates, see: http://www.irs.gov/pub/irs-pdf/p1542.pdf

Please keep the following factors in mind:
-          Amount must not exceed the federal rates
-          Employees must substantiate the time, place, and business purpose of the trip
-          Employees are not required to submit receipts to the employer if using a per diem allowance

Practical Application

Within the above guidelines, there is flexibility as to exactly how your company sets up an accountable reimbursement plan. Following are a few examples of some practical applications.

Example 1

The employer requires the employee to submit reimburseable receipts within 2 weeks of the date the expense was incurred, along with an explanation of the expenses’ business purpose. The employer then writes a check to the employee for the amount of the expense. The employer retains records of the expenses and reimbursement.

Example 2

An employee travels out-of-town. The employee provides the employer with the time, place, and business purpose of the trip to be reimbursed. The employer writes a check for the employee, based upon the federal per diem rate for that location. For rates, see: http://www.irs.gov/pub/irs-pdf/p1542.pdf

Example 3

The employer assumes that the employee will have reimburseable expenses. After a reasonable calculation for the expected expenses, the employer pays money to the employee. At the end of the month, the employee provides the employer with receipts for the expenses and any excess allowance.

Corporate Policy

However your corporation structures employee reimbursement, it is important that the policy is part of the corporate documents. Having the policy on file will help in the case of any IRS scrutiny.

_The following has been taken from IRS Tax Tip 2012-16

Tax Tips for the Self-employed 

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.