The proper way to reimburse yourself and your employees.

business expenses employees Aug 16, 2020

As a small business owner, you often incur costs for your business and if not properly reimbursed you may be SOL. The same goes for your employees too. Below we'll discuss the proper way to reimburse yourself and your employees via an accountable plan. 

Accountable Plan

An accountable plan is a business procedure in place that defines an employer's reimbursement or allowance arrangement. The expenses must have a business connection, must be reported accurately to employer within a reasonable amount of time and return any excess reimbursement or allowance timely.

Example #1 -Your employee (or yourself as S-Corp Shareholder/Employee) travels to a business conference and pays for the airfare, hotel and meals associated with the business trip on their personal visa. The employee documents all details and provides receipts to the employer for reimbursement. The employee is reimbursed tax free and the business can appropriately take those deductions.

Example #2 - You are an S-Corp Shareholder/Employee and drive your personal vehicle for business. You keep a detailed mileage log documenting location, date, purpose of the meeting and with whom. The log is turned into the S-Corp on a regular basis as defined by plan and the mileage is reimbursed to you based on the IRS defined standard mileage rate. You receive reimbursement for using your personal vehicle tax free and the company is allowed a deduction.

If you reimburse business expenses to yourself as a corporate owner or to your employees incorrectly, you turn what you thought was a tax-deductible reimbursement of business expenses into W-2 taxable income. Think how ugly this is.

  1. You incur a proper business expense.
  2. Your corporation reimburses you, the shareholder-employee, for the expense but does so in violation of the rules.
  3. You now have W-2 income from the improper reimbursement.
  4. You have no personal tax deduction for the proper business expense.
  5. Your corporation pays extra payroll taxes because the proper business expense is now a W-2 wage.

Ouch! Here's something else to think about. If you have employees who incur business expenses on behalf of your business and you don't reimburse them, they are simply out of that money. The Tax Cuts and Jobs Act (TCJA) denies them a federal deduction for those unreimbursed employee business expenses.

So keep your employees and your wallet happy by following the accountable plan rules and keeping proper documentation. 

Not sure where to start? Book a free 15 minute consult with us today. 

*This article is for informational purposes only and should not be relied on as written advice. Please consult the your tax pro before making any decisions.*