Compensation, Accountable Plans and Per Diem
Authored by Thomas Schultz, PHR, SHRM-CP; Human Resources Consultant
Organizations are seeing compensation pressure today more than ever. As a result, some are looking at compensation that comes from employee reimbursements. When employees pay for allowed, work-related expenses, organizations generally reimburse those expenditures. The amount reimbursed, can be taxable if it is not aligned with an accountable plan. More clients are asking whether elements of their compensation plans can be classified as “accountable” – so what is an accountable plan and how do they work?
When employees are reimbursed for various business expenses, those reimbursements may be taxable wages unless they meet certain criteria. An accountable plan allows the reimbursement of business expenses incurred by owners and employees, when documented, to be tax free. An accountable plan must meet three criteria, including:
- A business connection
- Timely validation / documentation
- Excess reimbursements repaid
Non-Driver Reasonable Period For Documentation
The IRS outlines two safe-harbor methods for meeting the timeliness requirements:
- Fixed Date Method – The IRS considers the timeline as timely when advance payments are made no more than 30 days before an employee incurs business expenses, the expenses are substantiated within 60 days after they are incurred or paid, and the excess payments are returned to the employer within 120 days after being incurred or paid.
- Periodic Statement Method – Companies that provide periodic statements to employees that are at least quarterly, for unsubstantiated expenses or unreturned excess payments, the IRS considers timeliness satisfied when expenses are substantiated, and the excess refunded within 120 days of the statement.
What About Documentation For Non-Drivers?
Employers with accountable plans are required to receive and retain documentation, or receipts, to substantiate the applicable expenses. These documents need to reflect essential information about the expenses including an amount, date, and location of the expense. The documents must substantiate the business-related nature of the expense.
Examples of reimbursable expense documentation include:
- Sales receipt: specifying the item, date, etc.
- Check: photocopy of a cancelled check
- Airline: invoice with payment method reflected
- Lodging: Daily, itemized receipt and payment confirmation
- Rental car: receipt from car rental return and payment confirmation
Per Diem
The General Services Administration (GSA) establishes the Federal per diem rates for travel. In each case, the receipts required are like those listed above with one key exclusion, per diems only cover lodging, meals and incidentals and do not include transportation costs.
- Full Pre-payment: Companies can give employees a set per diem by cash or some form of credit card before the reimbursement period.
- Partial Pre-payment: This happens when an employer advances some of the per-diem. Any other expenses would be paid by the employee, with receipts submitted.
- Reimbursing After The Period: In this case employees are reimbursed after they provide documentation.
For company and independent drivers (ID), generally, transportation companies are allowed to take a tax deduction for per diem expenses that are recognized/allowed and incurred by drivers. The per diem is paid by the company to the driver and considered reimbursement for meals and incidental expenses incurred. The reimbursement is not considered taxable compensation to the driver unless it exceeds the transportation industry per diem rate. The same practice is allowed for IDs except that instead of receiving a reimbursement from a company, the ID claims an additional expense on their business return or Schedule C for the days they are away from home overnight.
What Documents Are Generally Accepted?
Unique to the transportation industry is that record-keeping for drivers is generally limited to the retention of logs for all days out hauling fright. Others using per diems commonly document via receipt, invoice, or perhaps an itemized credit card statement. When a credit card statement is used, the business-related portions must be itemized in a way that separates them from other expenses.
CLA has professionals available to work through specific questions related to accountable plans.
Nathan is a CPA and has more than ten years of experience providing tax planning, consulting and compliance services to a number of privately held businesses and individuals in a variety of industries, with a special focus on the transportation and logistics industry. He actively communicates with clients and seeks ways to align their individual and business goals with available tax strategies to allow them to make well-informed decisions.
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