Use Accountable Plans for Employee Reimbursements: Tips for Tax-Free Reimbursements!

Reimbursing employees for business-related expenses is a routine part of running a business. But if not done correctly, it can create unexpected tax issues for both you and your employees. That’s why setting up an accountable plan is essential. It allows you to reimburse employees in a way that keeps the payments non-taxable and your records clean.

Below, we explain what accountable plans are, how they work, and why every small business should have one.

1. Business Connection

The first condition of an accountable plan is that the expense must have a clear business purpose. The money reimbursed should relate directly to the employee’s job or a company activity. Common examples include travel expenses for attending client meetings, purchasing office supplies, using a personal car for business errands, or meals during business trips. If there’s no connection to the business, the reimbursement cannot be excluded from taxable income.

2. Substantiation of Expenses

Employees must provide proof of the expense this is a key requirement. Acceptable documentation includes receipts, invoices, mileage logs, or travel itineraries that show the amount, date, and business purpose of the expense. This information must be submitted within a “reasonable period,” which the IRS generally considers to be within 60 days of the expense being incurred. Proper substantiation keeps you compliant and helps during audits.

3. Return of Excess Reimbursements

If you provide employees with a travel advance or an estimated reimbursement and they don’t use the full amount, the extra money must be returned. This is known as the return of excess reimbursements. The IRS requires that excess amounts be returned within 120 days. If employees keep the unused funds, it may be treated as taxable income.

4. Keep It in Writing

Even if you're managing a small team or a solo operation, having a written accountable plan policy adds structure. This policy should outline:

• What types of expenses are reimbursable
  

• What documents are needed for proof
  

• Timelines for submission and returning excess funds

  
  

This prevents confusion and ensures that everyone in the company follows the same process.

5. Benefits of Using an Accountable Plan

Setting up an accountable plan has multiple benefits:

• Tax savings for both employer and employee.
  

• Cleaner bookkeeping with organized records.

  
  

• Reduced risk during IRS audits.
  

• Increased employee satisfaction, since reimbursements aren’t taxed.
  

Without such a plan, all reimbursements are treated as part of the employee’s salary meaning more taxes and more paperwork.

Quick Checklist to Set Up an Accountable Plan

•  Write a clear policy document
  

•  Define eligible business expenses
  

•  Set deadlines for submitting receipts (e.g., 60 days)
  

•  Require return of excess funds within 120 days
  

•  Keep all receipts and documentation organized
  

•  Review your policy annually for updates
  

Final Thoughts: For small business owners, accountable plans are an easy win. They help you stay compliant, reduce tax burdens, and show employees that you run your business professionally. Take the time to create a simple plan it’ll pay off in peace of mind and financial clarity. #AccountablePlans #EmployeeReimbursements #TaxSavings #SmallBusinessTips #BusinessExpenses #TaxFreeReimbursements #BookkeepingTips #IRSCompliance #TaxCompliance #BusinessTaxTips #ExpenseManagement #IRSCompliance