Providers of California nonprofit audit and tax services recommend you reimburse employees and staffers for work-related expenses. Accountable plans are one such tool you can use to reimburse expenses free of federal income and employment taxes. Maximize your financial strategy with accountable plan benefits. Explore tax advantages and responsible spending for a sound financial foundation in your organization.
An accountable plan must meet three key IRS requirements: the expense must have a business connection, the employee must adequately account for the expense within a reasonable period of time, and any excess reimbursement must be returned to the organization promptly. When properly structured, reimbursements under an accountable plan are not considered wagesโmeaning they are excluded from the employeeโs gross income and not subject to federal payroll taxes.
Examples of reimbursable expenses include mileage for business travel, lodging during conferences, office supplies, and professional development courses. Documenting these expenses with receipts and clear records is essential to remain in compliance and ensure transparency.
Accountable plan payments also arenโt subject to withholding from paychecks or your organizationโs portion of federal employment taxes. Itโs a win-win for your California nonprofit and your employees. In the long term, implementing an accountable plan not only boosts employee morale by reimbursing legitimate expenses efficiently, but it also protects your organization from costly IRS penalties and ensures better financial oversight.
What do accountable plan benefits cover?
Accountable plans cover all โreasonableโ expenses that are directly related to business activities. This can include travel, lodging, meals, and office supplies. Your nonprofit also canโt reimburse more than what the employee actually paid. Proper documentation is essential. Employees must also return to you any excess payments within a certain time period, typically within 120 days of receiving the funds, to ensure compliance with IRS guidelines and avoid those amounts being treated as taxable income. Maintaining detailed records not only protects your organization during audits but also reinforces a culture of financial transparency and accountability.
Some expenses that could qualify for accountable plans include tools and equipment, office supplies, dues, and subscriptions related to your nonprofit. Expenses relating to meals, travel, and transportation can also qualify, but they must be directly related to your nonprofitโs operations.
How do you document accountable plans?
Accountable plans donโt have to be formally documented in writing, but itโs always a good idea to formally document your plans and finances. This makes it easier to prove your nonprofitโs validity to the IRS if any accountable plan payments are challenged.
While using an accountable plan, your nonprofit will be responsible for identifying the expenses and keeping the amounts separated from other accounts (e.g. wages). Your accountable plan also must reimburse expenses in addition to your employeesโ regular compensation. In other words, you canโt substitute tax-free reimbursements for compensation that your employees would otherwise have received.
Is there a proper way to record accountable plans?
Your accountable plans must maintain good records per IRS requirements. To an extent, this includes documentation of:
- The amount of the expense and the date,
- Place of the meal, travel, or transportation,
- Business purpose of the expense, and
- Business relationship of the people fed.
Employees should also be required to submit receipts for any expenses of $75 or more and for all lodgingโunless your nonprofit uses a per diem plan.
Accountable plans are a simple process
Because accountable plans can be informally documented, theyโre quite simple to establish. However, you can still reach out to an auditing service for assistance setting them up.
