Companies sometimes reimburse their workers for various expenses paid for by the employee. It is not always practical for businesses to directly pay all vendors as goods are bought or services are rendered. Employers can reduce payroll taxes for both their business and for their workers by paying employee reimbursements through an accountable reimbursement plan.

An accountable reimbursement plan is essentially a company policy that requires any employee who is provided funds in advance to account for the amount spent. The tax advantage is that the cost accounted for becomes a regular business expense. Alternatively, reimbursements that are not accounted for must be treated as wages and therefore subjected to employment taxes.

An accountable reimbursement plan does not necessarily have to be in writing. However, a written arrangement included as part of your company's overall policies helps ensure that the plan is established for tax purposes. A formal policy also helps in developing standard expense forms for employees to use when accounting for advances received.

Accountable reimbursement plan requirements 

In an accountable plan, an employee can receive an advance to cover upcoming expenses up to 30 days before the actual cost is incurred. Employees must then account for their expenditure within 60 days after the expense is paid. An important aspect of the plan is that any amount of funds advanced in excess of the actual cost must be returned to the company within 120 days after the expense is incurred.

Any excess advance amount not returned within the prescribed time frame is treated as wages and is subject to payroll taxes. If the excess advance amount is timely returned, no income is attributed to the employee. For your company, the net cost accounted for becomes a regular deduction and is not subject to employment tax.

De facto nonaccountable plan

If your business has no accountable reimbursement plan in place, it has a nonaccountable plan by default. As such, reimbursements to employees are considered to be the equivalent of wages and are added to their regular earnings to arrive at total employee income. The employee must then pay their portion of employment taxes, and your company is required to pay its matching payroll tax contribution.

Without an accountable plan already established, an employee cannot voluntarily return an excess advance amount to gain preferential tax treatment. Unless an accountable plan is in place, all reimbursements are treated as nonaccountable.

An accountable reimbursement plan requires additional bookkeeping, but it can save money on taxes. Contact a financial adviser for more guidance on choosing the most appropriate reimbursement policy for your business.