Accountable Plans and Expense Reimbursements

When an employee pays for something the business needs, such as a client trip, supplies or mileage, the employer can pay the employee back. Whether that repayment is tax-free or treated as wages depends on whether it runs through an accountable plan. The rules matter more now because most employees can no longer deduct work expenses on their own, so a properly run plan is often the only way to get a tax benefit. They also matter to S corporation owners, who are employees of their own companies.

The three requirements

An arrangement must satisfy all three rules, or it is a nonaccountable plan:

1. Business connection. The expenses must be ones the employee paid or incurred as part of doing the job.
2. Adequate accounting. The employee must substantiate each expense to the employer within a reasonable period. That generally means reporting the amount, time and place, and business purpose, with receipts for expenses of $75 or more and for all lodging.
3. Return of excess. The employee must give back any advance or reimbursement that exceeds the substantiated expenses, again within a reasonable period.

What counts as a reasonable period

The IRS safe harbors are:

• The advance is given no more than 30 days before the expense is incurred.
• The employee accounts for the expense within 60 days after it is paid or incurred.
• The employee returns any excess within 120 days after the expense is paid or incurred.

An employer that sends periodic statements, at least quarterly, asking employees to return or account for outstanding advances can instead require a response within 120 days of the statement. Other timing can also be reasonable depending on the facts.

What an accountable plan can cover

Common examples include business travel and lodging, client meals, mileage on a personal vehicle, supplies, business phone costs, professional dues and, for S corporation owner-employees, a reasonable share of home office costs. It does not matter whether the money is an advance or a repayment of an out-of-pocket cost, as long as the three rules are met.

Per diem and mileage

Instead of tracking every meal receipt, employers can reimburse travel meals and lodging with a per diem set by federal rates, and can reimburse mileage at the IRS standard mileage rate. For 2025 that rate is 70 cents per mile, and for 2026 it is 72.5 cents per mile for January through June and 76 cents per mile for July through December. See vehicle and mileage deductions.

The federal per diem rates are published by the General Services Administration and vary by location. As one example, the standard rate for locations that are not specifically listed has been $178 per day for the federal fiscal years 2025 and 2026, made up of $110 for lodging and $68 for meals and incidental expenses. Employees still need to substantiate the time, place and business purpose of the travel.

If an employer pays an allowance above the federal rate, the excess is taxable wages reported in box 1 of Form W-2, and the portion up to the federal rate is reported with code L in box 12.

Nonaccountable plans

A plan that does not meet the rules, such as a flat monthly allowance with no accounting or one that lets employees keep any unreturned advance, is a nonaccountable plan. The full payments are treated as wages: they are reported in box 1 of Form W-2 and subject to withholding and payroll tax. The employee usually cannot deduct the related expenses. Form 2106 is limited to Armed Forces reservists, qualified performing artists, fee-basis state or local government officials and employees with impairment-related work expenses.

Employer tax treatment

Employers generally deduct accountable plan reimbursements as business expenses. The 50 percent limit on meals applies to the person who bears the cost, so the employer generally applies it to reimbursed meals. Entertainment remains nondeductible. For amounts paid after 2025, employers can no longer deduct the cost of most on-premises meals provided for the employer's convenience. See business expense deductions.

Setting up a plan

• Adopt a written policy that states the three rules, what expenses are covered, how to submit them and by when.
• Use an expense report with receipts attached, and keep it with payroll records.
• Reimburse promptly after substantiation, and follow up on advances.
• Do not turn salary into "reimbursements" to avoid tax. A plan should reimburse actual expenses.
• For an S corporation owner, keep the plan consistent with reasonable compensation and the rest of the payroll setup.

How we can help

We help employers draft a written accountable plan, set up an expense reporting routine, run reimbursements through payroll correctly and make sure Form W-2 reporting is right. Learn about our payroll services and business tax preparation, or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.