# Accountable plan

> An accountable plan is an IRS-recognized way to reimburse employee business expenses so that the payments are not treated as taxable wages.

An accountable plan is an employer's reimbursement or allowance arrangement that meets three IRS rules:

1. **Business connection.** The expenses were paid or incurred while performing services as an employee.
2. **Adequate accounting.** The employee substantiates the expenses (amount, date, place, business purpose, with receipts where required) within a reasonable period of time.
3. **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.

Sources:

- [IRS Publication 463, Travel, Gift, and Car Expenses (Accountable Plans)](https://www.irs.gov/publications/p463)
- [IRS Publication 15 (Circular E), Employer's Tax Guide (Accountable plan)](https://www.irs.gov/publications/p15)

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