In today’s competitive business environment, attracting and retaining top talent is a priority for many organizations. Employee benefits play a crucial role in this effort, as they can significantly impact an individual’s decision to join or remain with a company. One often-overlooked approach to providing tax-advantaged benefits to both employees and business owners is through the implementation of an accountable plan. This article will explore the tax benefits of an accountable plan and explain how it can be advantageous for both employees and business owners.
What is an Accountable Plan?
An accountable plan is a reimbursement or allowance arrangement between an employer and their employees, which complies with the Internal Revenue Service (IRS) regulations. The plan reimburses employees for necessary and ordinary business expenses, such as travel, meals, and entertainment, incurred while performing their job duties. To qualify as an accountable plan, the arrangement must meet three requirements:
1. Business Connection: Expenses must be directly related to the employee’s job and have a valid business purpose.
2. Substantiation: Employees must provide detailed documentation, such as receipts, to substantiate the expenses within a reasonable time frame.
3. Return of Excess Amounts: If the employer provides an allowance, any unused portion must be returned to the employer within a reasonable period.
Tax Benefits for Employees
When an employer implements an accountable plan, employees benefit from tax savings in the following ways:
1. Exclusion from Income: Reimbursements made under an accountable plan are not considered taxable income for the employee. This means that they are not subject to federal, state, or local income taxes or payroll taxes, such as Social Security and Medicare taxes. Consequently, employees can receive reimbursements for legitimate business expenses without increasing their taxable income.
2. No Itemization Requirement: Unlike non-accountable plans, employees do not need to itemize their deductions to benefit from an accountable plan. They are not required to meet the 2% of adjusted gross income threshold, which can make it difficult for employees to deduct unreimbursed expenses on their tax returns.
Tax Benefits for Business Owners
An accountable plan provides tax benefits for business owners as well:
1. Deductible Business Expenses: Employers can generally deduct the full amount of reimbursements made under an accountable plan as ordinary and necessary business expenses, reducing their taxable income and potentially lowering their tax liability.
2. Lower Payroll Taxes: Since accountable plan reimbursements are not considered taxable wages, employers can save on payroll taxes, such as Social Security and Medicare taxes, as well as federal and state unemployment taxes. This reduction in tax liability can lead to significant savings for the business owner.
An accountable plan can offer substantial tax benefits to both employees and business owners. By implementing a compliant plan, employers can attract and retain top talent by offering tax-advantaged benefits, while also realizing tax savings for their business. It is essential for business owners to consult with tax professionals to ensure the proper setup and administration of an accountable plan, maximizing its potential benefits and ensuring compliance with IRS regulations.
This article was written by chat.openai.com and was edited for accuracy by Daniel J. Rohr, CPA/PFS, EA, M.S. Tax.