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.
Accountable plan payments also aren’t subject to withholding from paychecks or your organization’s portion of federal employment taxes. It’s a win-win for your California nonprofit and your employees.
What do accountable plans cover?
Accountable plans cover all “reasonable” expenses that are related to business. Your nonprofit also can’t reimburse more than what the employee paid. Employees must also return to you any excess payments within a certain time period.
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 nonprofit’s operations.
How do you document accountable plans?
Accountable plans don’t have to be formally documented in writing, but it’s always a good idea to formally document your plans and finances. This makes it easier to prove your nonprofit’s 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 employees’ regular compensation. In other words, you can’t 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 lodging—unless your nonprofit uses a per diem plan.
Accountable plans are a simple process
Because accountable plans can be informally documented, they’re quite simple to establish. However, you can still reach out to an auditing service for assistance setting them up.