Accountable Planning: Its not that hard really!
Failure to use an accountable plan for your employee expense reimbursements (including yourself if you operate as a corporation) turns those improper reimbursements into taxable wages. (Yikes!)
What is an accountable Plan you ask?
Here’s the technical definition:
An accountable plan is a plan that follows the Internal Revenue Service (IRS) regulations for reimbursing workers for business expenses in which reimbursement is not counted as income.
In other words, without proper documentation these expenses turn into income. That’s about as dreadful as it can get for all parties involved.
- The employees are charged income taxes on a business expense.
- The business has to pay more payroll taxes because now that employee is ‘earning’ more money.
So Basically a Lose-Lose!
If you have employees who spend their own money on behalf of your business and you don’t reimburse them, they are simply out that money. (Making for very angry employees!) The Tax Cuts and Jobs Act (TCJA) no longer allows your employee to count these expenses as deductions on their taxes. (Again, this makes for VERY UNHAPPY employees.)
Now this is a Lose-Lose-Lose for an Owner with business expenses paid personally!
your personal money will be considered an income from the company and the company will have to pay income tax on that money. so, you lose personally, as an owner-employee, and as a company.
This is why an accountable plan is SO IMPORTANT!
Here is how to get a Win-Win!
Therefore with the right documentation, the employee receives the out of pocket expense tax-free. (Yay for the employee!). The corporation deducts the business expenses and is not viewed as employee income. (Yay for the company!)
The moral of this is DOCUMENT! DOCUMENT! DOCUMENT!
