Accountable Plans and Fringe Benefits
As an increasing number of individuals begin to work from home, either by choice or otherwise, many employers have begun to pay for expenses incurred by their employees in an effort to support their remote working environment, while others have begun offering certain fringe benefits to boost morale or show appreciation. We have fielded many questions from our clients as to the tax consequences to both the employers and employees in these types of situations, and ultimately the deciding factors are:
- Are the payments made through an accountable plan?
- What expenses are the payments used for?
Essentially, an accountable plan is a way for employers to reimburse out of pocket ordinary and necessary business expenses their employees incur. The employee does not recognize income on their end, and the employer is able to recognize the reimbursement as a business expense. Accountable plan agreements are quite simple, and boilerplate forms can be found online. There are rules, however, in order for these payments to be treated in this manner for tax purposes.
- The expenses must be ordinary and necessary for the business, and the expenses must be incurred while the employee is performing work for the company. These can include mileage for business-related driving, meals with clients and out-of-pocket travel expenses. They can also include a portion of mixed-use expenses – that is, those with a personal and business component, such as home office expenses, cell phones and home internet. The personal use portion, however, must be repaid, or it will be treated as income for the employee.
- There must be substantiation to support the deduction. This includes invoices, receipts, or mileage logs for mileage reimbursement.
- Any excess reimbursements over actual expenses must be repaid within 120 days. This includes any personal use expenses, as mentioned above.
An additional benefit of having an accountable plan, is that it can also be used to reimburse S-Corp owners for their business use of home. Deductions typically allowed only for sole proprietors filing a Schedule-C, or deducted on Schedule E for unreimbursed partnership expenses, using an accountable plan allows an active shareholder in an S-Corp to be reimbursed for an allocated portion of their home maintenance expenses, including mortgage interest, property tax, insurance, utilities, home internet, trash, and repairs and maintenance. The expenses are allocated based on the percentage of square footage of the shareholder’s home that is used regularly and exclusively for business. It’s important to keep in mind that any portion of mortgage interest and property taxes that’s reimbursed through an accountable cannot be reported on Schedule A.
While the accountable plan requires strict substantiation of expenses and repayment of non-business purchases, the non-accountable plan, or allowance plan, relaxes those regulations. Non-accountable plans do not require substantiation or repayment for non-business purchases, which therefore classifies all payments made through a non-accountable plan taxable income to the employee, and subject to all applicable payroll taxes. This includes fringe benefits such as gym memberships, ski passes (obviously not a business-related expense), or stipends paid to employees with no expectation of substantiation. This makes sense, as an employer could give their employee $1,000 to buy themselves office furniture, and the employee could pass on buying the chair and pocket the $1,000. Clearly this transaction gives rise to income for the employee, and should be treated as such.
While comparing the two different scenarios (accountable vs non-accountable), it should be noted that an employee reimbursed under a non-accountable plan could make an out of pocket ordinary and necessary business purchase, and that amount would still be included as taxable as income towards the employee. IRS Publication 15 states the following:
“Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes.”
The big takeaway here, is that if an employer wishes to reimburse their employees for business related expenses, the accountable plan is the more advantageous route, as it avoids the employee having to recognize the reimbursement as wages, and keeps the employer from paying payroll taxes on the reimbursement. And if an employer wants to treat their employees to non-business-related perks, or provide them with a stipend/allowance, the amounts of these expenses will be considered income to their employees.
Aaron Lavarias, CPA
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