If you often reimburse employees for job-related expenses they incur, accountable plans can offer significant benefits. Accountable plan reimbursements are not taxable to the employee and are fully deductible by the employer, with the exception of meal and entertainment expenses.
In one particular Field Service Advice (FSA), the IRS addressed the reimbursement of expenses of couriers. The couriers picked up and delivered packages in a certain geographic area. The employees used their own vehicles and the company reimbursed them for such use and paid them for their mileage expenses. However, the expense reimbursements were not based on the employees’ actual expenses but rather a percentage of their commissions were to be allocated to wages and a percentage to equipment rental (i.e., use of the employees’ vehicles). The employees were not required to submit mileage or expense documentation to the employer. The employees’ wages were reported on their W-2s and the expense reimbursements were reported on Form 1099s.
The IRS found that since the employees did not report their actual expenses to the employer, the reimbursements were not part of an “accountable plan,” so the full amount reported on the 1099 was subject to employment taxes. While this FSA involved a delivery service, the rules apply to all businesses. Although some exceptions exist, it’s best to either include the full amount in wages, or require employees to submit detailed expense reports for reimbursement under an accountable plan. Reimbursements must be for job-related expenses that the employee would reasonably expect to incur, and the employee must provide substantiation and return any excess reimbursements within a reasonable period of time.