Accountable plan
An accountable plan is a reimbursement arrangement that meets three IRS requirements, so business expense reimbursements are not treated as wages.
Payments under the plan stay out of taxable wages and off Form W-2Form W-2. Form W-2 is the annual wage and tax statement you give employees and file with the Social Security Administration, reporting wages paid and taxes withheld.Click to open the term. Payments outside one are wages subject to withholding and reporting. Failing any one requirement moves the payment, and sometimes the whole arrangement, into nonaccountable treatment. Payroll then adds the amount to taxable wages and withholds income tax, Social Security, and Medicare. A flat monthly car allowance paid without mileage logs is the standard example: intended as a reimbursement, taxed as compensation.
What are the three requirements?
Treasury Regulation section 1.62-2 sets out all three, and IRS Publication 463 explains them in plain terms. Per diem at or below the federal rates, with time, place, and business purpose documented, is treated as substantiated. Amounts above those rates are wages to the extent of the excess. For a nonexempt employee, the regular rate includes any part that exceeds a reasonable approximation of expenses incurred for you. Map earning codesEarning code. An earning code is the configured category that tells payroll how one kind of pay behaves for tax, rate calculation, and reporting.Click to open the term by behavior, not by name, because a code named reimbursement or allowance can be taxable or nontaxable.
| REQUIREMENT | WHAT IT TAKES |
|---|---|
| Business connection | An expense the employee paid or incurred while performing services for you, deductible in nature |
| Substantiation | Amount, time, place, and business purpose documented within a reasonable period, illustrated as 60 days after the expense |
| Return of excess | Any advance or allowance beyond the substantiated amount goes back to you, illustrated as within 120 days |
- 26 CFR §1.62-2, Reimbursements and other expense allowance arrangements
- Publication 463 (2025), Travel, Gift, and Car Expenses
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.