Written by Marc R Barnes EA
September 28, 2010
Do you qualify for this money-saving vehicle?

Payroll taxes are a big cost of doing business, and any way you can save money is always worth looking into. One way to save on payroll taxes is to use an accountable plan. Under this plan, you save money on payments you make to employees for reimbursements of expenses or advances made in anticipation of such expenses.

The great advantage of an accountable plan is that it saves the employer money because reimbursements made to the employee do not have to be counted as wages to that employee. For this reason, the employer does not have to pay any of the related payroll taxes on those amounts, nor is the employee’s reimbursement reduced by FICA taxes. It’s a win-win situation.

In order to have an accountable plan, you must have a written document that meets the following three requirements:
  • Business Connection. The plan pays reimbursements and allowances only for deductible business expenses. This might sound obvious, but it needs to be included in the document. The business must observe this requirement at all times.
  • Adequate Substantiation. The plan requires substantiation of the expenses being reimbursed. The employee accounts for the expenses by submitting a written report to the company that details and substantiates the time, place, amount, and business purpose for every expense.
  • Employees Must Return Any Extra Advances. The plan must require the employee to pay back any advances that exceed the business expenses he or she incurred. If extra amounts are not paid back to the employer, they are treated as wages to the employee, subject to payroll tax withholding. This would defeat the entire purpose of having an accountable plan in the first place.

It’s never too late to set up an accountable plan and begin enjoying the tax savings right away.