Accountable plans reimburse employees for work-related expenses free of federal income and employment taxes. Reimbursement payments aren’t subject to withholding from staffers’ paychecks. Your not-for-profit also benefits because the reimbursements aren’t subject to the employer’s portion of federal employment taxes.
Most prospective employees probably won’t accept a job based on the availability of an accountable plan. However, offering one can help you retain valuable workers who submit frequent reimbursement requests.
The IRS stipulates that all expenses covered in an accountable plan have a business connection and be “reasonable.” Additionally, employers can’t reimburse employees more than what they paid for any business expense. Employees must account to you for their expenses and, if an expense allowance was provided, return any excess allowance within reasonable time.
Examples of expenses that might qualify for a tax-free reimbursement through an accountable plan include tools and equipment, home office supplies, dues, and subscriptions. Certain meal, travel, and transportation expenses also qualify.
How do you establish an accountable plan? It isn’t required to be in writing. Formally documenting your plan makes it easier for your nonprofit to prove its validity to the IRS if it’s challenged.
When administering your plan, your nonprofit is responsible for identifying the reimbursement or expense payment and keeping these amounts separate from other amounts, such as wages. The accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal your nonprofit, you can’t substitute tax-free reimbursements for compensation that employees otherwise would have received.
Keep good records
The IRS also requires employers with accountable plans to keep good records for expenses that are reimbursed. This includes, to the extent applicable, documentation of:
Date and amount of the expense
Place of expense
Purpose of the expense
Business relationship of the people benefiting from the expense
You also should require employees to submit receipts for any expenses of $75 or more and for all lodging unless your nonprofit uses a per diem plan.
Plans don’t have to be formal, and they’re relatively simple to establish.
How HoganTaylor Can Help
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact the Jack Murray, CPA, Nonprofit Practice Lead, at firstname.lastname@example.org.
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