Using the “per diem” approach when reimbursing employees for lodging, meals and incidental expenses requires the use of either IRS tables or a simplified high-low method to reimburse workers up to specified limits. Organizations seem to really like the per diem approach because of its simplicity. It doesn’t require too much record keeping and keeping up with receipts. However, the per diem method may put your organization at risk if you exceed the per diem limits. Exceeding the per diem limits exposes your organization to IRS penalties and your employees to higher tax liabilities. This is typically why organizations will often switch to an “accountable plan” for handling employee expense reimbursements.
Tax Advantages of An Accountable Plan
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. The biggest advantage is that your organization can deduct expenses (subject to a 50% limit for meals and entertainment), and employees and subcontractors can usually exclude 100% of advances or reimbursements from their incomes. Workers whose jobs involve frequent travel may realize significant tax savings.
How to Qualify As An Accountable Plan
Under IRS rules, your accountable plan must meet the following three criteria:
- The plan must only reimburse “ordinary & necessary” business-related expenses that would otherwise be deductible by the employee or subcontractor.
- Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly by turning in receipts.
- Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
Failure to meet these conditions, will cause the IRS to treat your plan as “non-accountable”, which then transforms all reimbursements into wages taxable to the employee and subject to income and employment taxes.
Need Some Help?
Accountable plans take time to establish and require meticulous record keeping. Let us help. We’d be happy to assist you in setting up your accountable plan and regularly reviewing its compliance with IRS rules.