An accountable plan is an employer's reimbursement or allowance arrangement that meets three IRS rules:
- Business connection. The expenses were paid or incurred while performing services as an employee.
- Adequate accounting. The employee substantiates the expenses (amount, date, place, business purpose, with receipts where required) within a reasonable period of time.
- Return of excess. Any amount advanced beyond the substantiated expenses is returned within a reasonable period of time.
Payments under an accountable plan are not wages: they are not included in box 1 of the employee's Form W-2 and are not subject to income tax withholding or payroll taxes. Payments that fail the rules are treated as made under a nonaccountable plan and become taxable wages.
What counts as a reasonable period
It depends on the facts, but the IRS treats these as reasonable: receiving an advance within 30 days of the expense, accounting within 60 days after it was paid or incurred, and returning any excess within 120 days. A periodic statement (at least quarterly) asking employees to account or return advances, with 120 days to comply, also works.
Example
Jordan receives a $1,000 travel advance and spends $820, with receipts (illustrative). He submits his expense report and returns $180 within the safe harbor periods, so none of it is wages. If he never returned the $180, that amount would be treated as wages.
Common pitfalls
- No written policy, so nobody knows the deadlines.
- Flat allowances paid with no substantiation.
- Advances that stay open for months.
This is a general summary, not tax advice. Check the IRS sources below or a tax professional.