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Springs & Denver Offices observe Fall Hours, both offices close at NOON MST on Fridays October 18 – December 27, 2024
Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Springs & Denver Offices observe Fall Hours, both offices close at NOON MST on Fridays October 18 – December 27, 2024
The reporting of employer expense reimbursements by employees will vary based on whether the employer reimburses under an accountable or nonaccountable plan. This article will briefly discuss the two types of expense reimbursement plans and what the tax consequences are for the employee.
To qualify as an accountable plan, the employer’s reimbursement arrangement must require all of the following:
On the other hand, nonaccountable plans are reimbursement arrangements that do not meet one or more of the requirements listed above. For example, an employee who is reimbursed under an accountable plan, but fails to return, within a reasonable time, excess reimbursements. In this example, the excess reimbursements would be treated as if paid under a nonaccountable plan. In addition, if an employee is repaid for business expenses by reducing the amount reported as wages, it will be considered a nonaccountable plan.
The IRS states that a reasonable period of time depends on the facts and circumstances of each situation. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:
The second requirement for an accountable plan says that the employee must adequately account to the employer for expenses. Examples of adequate accounting by the employee include providing the employer a statement of expense, account book, diary, or similar record in which the expense is entered at or near the time it was paid. The employee also must provide documentary evidence, like receipts, of travel, mileage, and other business expenses.
It’s important to note that the employee must provide the employer with the same type of records and supporting information that would have to be provided to the IRS if the IRS questioned a deduction on the tax return.
So why does it matter if your employer uses an accountable or nonaccountable plan? It matters because it affects how you will report the reimbursements and expenses for tax purposes. Expense reimbursements under accountable plans should not be included in box 1 wages on the employee’s Form W-2. In addition, as long as the expenses equal the reimbursements, the employee should not file Form 2106 to report employee business expenses nor claim a deduction.
In the case of reimbursements under a nonaccountable plan, the employer will include the amount of reimbursements in box 1 wages on Form W-2. The employee must complete Form 2106 and itemize deductions to deduct business expenses. Only the business expenses greater than 2% of adjusted gross income will qualify for a deduction on Schedule A of Form 1040.
Whether a reimbursement arrangement is an accountable or nonaccountable plan is determined based on whether the plan meets all three requirements of an accountable plan. While accountable plans have requirements that must be met, they could be viewed as more favorable to employees for tax reporting purposes.
If you have questions about your expense reimbursement plan – as an employer or an employee – please contact us to discuss.