If you often reimburse employees for job-related expenses they incur, accountable plans can offer a significant measure of safety. Reimbursements under an accountable plan aren’t taxable to the employee and (with the exception of meal and entertainment expenses) are fully deductible by the employer. For the accountable plan to qualify, reimbursements must be for job-related expenses that the employee would reasonably expect to incur, and the employee must provide substantiation and return any excess reimbursements within a reasonable period of time.

Consider this scenario: A courier business employees picks up and delivers packages using their own vehicles. The company’s reimbursements aren’t based on the employees’ actual expenses but instead, their commissions is split between wages and equipment rental (i.e., use of the employees’ vehicles). The employees aren’t required to submit mileage or expense documentation to the employer. The employees’ wages are reported on their W-2s and the expense reimbursements on their 1099-MISCs.

In this situation, since actual expenses aren’t reported to the employer, the reimbursements aren’t part of an accountable plan. As a result, the “reimbursement” must be included on the employees’ Forms W-2 and subject to employment taxes.

While this scenario involves a delivery service, the rules apply to all businesses. Although some exceptions exist, it’s best to either include the full amount in wages or require employees to submit detailed expense reports for reimbursement under an accountable plan.

For more information, contact your Bothell Accountant at Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, personal and business taxes, and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kirkland, Kenmore, Mill Creek and surrounding areas.