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The 3 Requirements for Making Expense Reimbursements

Confused about the requirements for making expense reimbursements? We'll guide you step by step to make it simple.

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Justworks
Feb 26, 20162 minutes
3 requirements for making expense reimbursements

Learning more about business expenses? We have a free expenses ebook to help you out with that.

If you’re starting out with your first business, all the IRS jargon around expense reimbursements and accountable plans may feel overwhelming. This post aims to boil down those garbled phrases into clear instructions you can use today.

For example, did you know that certain expenses your business incurs may reduce your businesses’ overall taxable income? Put simply: pay your employees back for their expenses on required business costs, and the feds will cut you a little slack.

But how do you know which expenses qualify to reduce taxable income? First, you need to have an “accountable plan.”

Business Expenses: A Beginner's Guide To Building A Plan

Why do businesses need an accountable expense plan?

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What is an Accountable Plan?

When you have an employee who needs reimbursements on a business expense, you need an accountable plan for those expenses to be valid. That means those expense reimbursements must fall under three conditions. If they do, you’ll be qualified to report them, and eventually get a tax break in return.

What Are the Requirements for an Accountable Plan?

You need three things to qualify for an accountable plan:

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According to the IRS, the business expense must have been incurred in the performance of services as an employee of the employer.

Translation: You can pay your employee back for business expenses if they’re business expenses. That means expenses incurred related to the job, reported within a reasonable time frame.

Why Should I Have One?

If you don’t have an accountable plan, both you and your employees will lose money. That’s because your employee will have to pay taxes on the expense reimbursements and you’ll have to pay Medicare, FUTA, and Social Security on those wages as well. Having an accountable expense reimbursement plan is a vital practice for any business.

When it comes down to it, business expenses make sense. And once you get the hang of them, they’ll make a positive impact on both your business and your employees.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.