How to save taxes for business owners?
As the owner of a small business, you know how important it is to minimize taxes while staying compliant with IRS regulations. One often-overlooked but highly effective tax strategy is implementing an accountable plan. This simple yet powerful tool allows you to reimburse employees (including yourself) for business expenses tax-free, reducing taxable income for both the company and its employees.
In this guide, we’ll break down what an accountable plan is, how it works, and how your S Corporation can benefit from it.
What Is an Accountable Plan?
An accountable plan is an IRS-approved reimbursement arrangement that allows an S Corporation to reimburse employees for legitimate business expenses without the payments being treated as taxable wages. To qualify, the plan must meet three key requirements:
1. Business Connection
The expenses must be directly related to the business. They do not have to be paid for directly by the business, in fact, another name for this plan is an employee reimbursement plan.
The expenses should be business oriented. Remember that to be deductible an expense should be reasonable and necessary for the operations of your business.
2. Substantiation
Employees must provide receipts, expense reports, or other documentation. Just like every other expense in your business, you need to be able to support them with actual receipts. (Credit card statements do not suffice here…)
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3. Return of Excess Payments
If the employee receives an excess reimbursement, they must return the unused portion to the company. This is a reimbursement plan, meaning that you are reimbursing actual, substantiated costs.
When structured correctly, accountable plan reimbursements are not subject to payroll taxes and are deductible by the business, creating a win-win situation.
What Expenses Can Be Reimbursed Under an Accountable Plan?
Your S Corporation can reimburse a wide range of business-related expenses under an accountable plan, including:
- Home Office Expenses – If you work from home and meet the IRS qualifications, a portion of your mortgage, rent, utilities, and internet among other expenses may be reimbursed.
- Mileage & Vehicle Expenses – Business-related vehicle use can be reimbursed at the IRS mileage rate.
- Travel & Meals – Business-related travel, lodging, and meals qualify.
- Supplies & Equipment – Items necessary for running the business, such as office supplies, software, and technology.
- Continuing Education – Courses, certifications, and seminars that enhance job-related skills.
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Why S Corporation Owners Should Use an Accountable Plan
Without an accountable plan, any reimbursement your S Corporation provides could be treated as taxable wages, meaning you’ll pay additional payroll taxes and increase your taxable income. Here’s why implementing an accountable plan makes financial sense:
✅ Reduces payroll taxes – Since reimbursements aren’t treated as wages, they’re not subject to FICA, Medicare, or unemployment taxes.
✅ Increases tax deductions – The business can deduct reimbursed expenses without increasing employee taxable income.
✅ Keeps IRS-compliant records – Having a structured plan with documentation helps prevent IRS scrutiny.
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How to Set Up an Accountable Plan for Your S Corporation
Setting up an accountable plan is relatively straightforward. Follow these steps:
1. Create a Written Plan
Although not required, having a formal written accountable plan helps document your compliance with IRS guidelines. The plan should outline:
- Eligible expenses
- Reimbursement process
- Documentation requirements
- Deadlines for submitting receipts
2. Require Proper Documentation
Employees (including yourself) must submit receipts, mileage logs, or other proof of expenses within a reasonable timeframe (typically 60 days). Using an expense report template can help keep records organized.
3. Reimburse Employees Correctly
Payments should be made separately from payroll to avoid confusion. Do not include reimbursements in W-2 wages.
4. Ensure Excess Amounts Are Returned
If an employee receives more than they actually spent on business expenses, they must return the excess within a reasonable timeframe (usually 120 days). Otherwise, it may be treated as taxable income.
Common Mistakes to Avoid
❌ Not documenting expenses properly – Failure to keep receipts and records can lead to IRS challenges.
❌ Reimbursing personal expenses – Only legitimate business expenses should be reimbursed.
❌ Commingling reimbursements with salary – Reimbursements should be paid separately from payroll to avoid misclassification.
Want to implement this strategy for your business? Download our Accountable Plan Template Here and start saving today!
Final Thoughts: Take Advantage of This Powerful Tax Strategy
An accountable plan is an easy and effective way for S Corporation owners to reduce payroll taxes, maximize deductions, and keep business expenses separate from personal finances. If you’re not using one already, now is the time to set up a plan and ensure you’re getting the tax benefits you deserve.
Need help implementing an accountable plan for your S Corporation? Schedule a discovery call with The Nash Group today, and let’s optimize your tax strategy!
Chris Nash
President, The Nash Group
Chris Nash, CPA is a trusted business advisor with over a decade of experience in tax, business, and advisory services. He provides candid, no-nonsense advice to help clients navigate tax and financial challenges and achieve their wealth and legacy goals. His firm has helped hundreds of business owners save tax, make more money, and build their financial future.