Accountable Plans for Employee Expense Reimbursements: Tax-Free Treatment Under IRC 62

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

An accountable plan is one of the most underutilized tax tools for small businesses. Under Treas. Reg. 1.62-2, an employer that reimburses employee business expenses through an accountable plan can exclude the reimbursements from the employee’s taxable income. This matters significantly after the TCJA (2018-2025), which eliminated the unreimbursed employee expense deduction on Schedule A. Without an accountable plan, an employee who pays $5,000 in business expenses out of pocket gets no tax deduction. With an accountable plan, the employer reimburses the $5,000, deducts it as a business expense, and the employee receives it tax-free. The three requirements are straightforward: business connection (the expense must be a legitimate business expense), substantiation (the employee must provide receipts and documentation within 60 days), and return of excess (any reimbursement exceeding the substantiated amount must be returned within 120 days). For S-Corp owner-employees, the accountable plan is the primary mechanism for deducting expenses like home office costs, vehicle expenses, and professional development that would otherwise be non-deductible personal expenses.

✓Key takeaway

Accountable plan requirements (Treas. Reg. 1.62-2):

Requirement	Details	Safe Harbor Timeline
1. Business connection	Expense must be deductible business expense under IRC 162	N/A
2. Adequate accounting (substantiation)	Employee provides receipts, documentation, business purpose	Within 60 days of the expense
3. Return of excess	Employee returns any reimbursement exceeding substantiated amount	Within 120 days of the expense

Accountable plan vs. non-accountable plan:

Factor	Accountable Plan	Non-Accountable Plan
Included on W-2?	No (excluded from wages)	Yes (taxable compensation)
Subject to income tax?	No	Yes
Subject to FICA?	No	Yes
Subject to FUTA?	No	Yes
Employer deduction?	Yes (as business expense, not wages)	Yes (as wages)
Employee deduction for expenses?	N/A (reimbursed tax-free)	None (TCJA suspended Form 2106)
Documentation required?	Yes (receipts, substantiation)	No (but then it’s taxable)

Expenses commonly reimbursed through an accountable plan:

Expense	Deductible Through Accountable Plan?
Home office (S-Corp shareholder-employee)	Yes (rent or depreciation for dedicated space)
Vehicle/mileage (business use)	Yes (standard mileage rate or actual expenses)
Business travel (airfare, hotel, meals)	Yes
Cell phone (business use portion)	Yes
Professional development and education	Yes
Professional dues and subscriptions	Yes
Business supplies	Yes
Client entertainment/meals (50% limit applies at employer level)	Yes
Internet (business use portion)	Yes

How does an accountable plan save taxes for an S-Corp owner?

Hypothetical example

Round numbers. An S-Corp with one owner-employee who works from home and drives a personal vehicle for business. Without an accountable plan, these expenses are non-deductible personal expenses (TCJA eliminated the employee business expense deduction).

Annual business expenses paid by the owner personally:

Expense	Amount
Home office (200 sq ft dedicated, rent allocation)	$6,000/year
Vehicle (12,000 business miles at 70 cents)	$8,400/year
Cell phone (80% business use)	$960/year
Business internet (60% business use)	$720/year
Professional development	$2,000/year
Professional dues	$500/year
Business supplies	$420/year
Total	$19,000/year

Without accountable plan:

Item	Amount
Owner pays $19,000 out of pocket	($19,000)
Employee business expense deduction (Form 2106)	$0 (suspended by TCJA)
Tax savings	$0
After-tax cost to owner	$19,000

With accountable plan:

Item	Amount
S-Corp reimburses $19,000 under accountable plan	$19,000
Included on owner’s W-2?	No (excluded)
Income tax on reimbursement	$0
FICA on reimbursement	$0
S-Corp deducts $19,000 as business expense	($19,000) deduction
S-Corp tax savings (pass-through at 24% bracket)	$4,560
FICA savings (employer 7.65% + employee 7.65% = 15.3%)	$2,907
Total tax savings	$7,467/year
After-tax cost to owner	$0 (reimbursed + tax savings)

The $7,467 annual savings breaks down as:

Tax Saved	Amount
Federal income tax (24%)	$4,560
Employee FICA (7.65%)	$1,454
Employer FICA (7.65%)	$1,454
Total	$7,467

Over 10 years, the accountable plan saves $74,670 in taxes on $190,000 of expenses that would otherwise be entirely non-deductible.

Implementation requirements:

Step	Details
1. Written accountable plan document	Board resolution or corporate policy adopted by the S-Corp
2. Define reimbursable expenses	List the categories of expenses eligible for reimbursement
3. Set substantiation deadlines	60 days to submit receipts, 120 days to return excess
4. Employee submits expense reports	With receipts, amounts, dates, business purpose
5. S-Corp reviews and reimburses	Separate check or deposit (not commingled with salary)
6. S-Corp books the expense	Debit: specific expense account; Credit: cash
7. NOT included on W-2	Reimbursements under an accountable plan are excluded

Common mistakes that convert an accountable plan to non-accountable:

Mistake	Consequence
No written plan	Reimbursements treated as taxable wages
No receipts or substantiation	Unsubstantiated amounts are taxable
Excess reimbursement not returned	Excess treated as taxable wages
Fixed monthly allowance with no accounting	Treated as additional compensation (taxable)
Reimbursement paid regardless of actual expenses	Non-accountable (taxable)
No business connection documented	Reimbursement is taxable

The per diem alternative (simplified substantiation): For business travel, the employer can use IRS per diem rates instead of requiring actual receipts for meals and incidental expenses:

Location	2025 Per Diem (M&IE)
Standard rate (most locations)	$68/day
High-cost locations (NYC, SF, DC)	$74-$79/day

The employer reimburses the per diem amount, the employee does not need meal receipts (only proof of the business travel itself), and the reimbursement is excluded from income. The employer’s deduction for the meal portion is subject to the 50% limit.

Sole proprietors cannot use an accountable plan. The accountable plan requires an employer-employee relationship. A sole proprietor is self-employed and deducts business expenses directly on Schedule C. The accountable plan is relevant for: S-Corp shareholder-employees, C-Corp owner-employees, and employees of any business entity.

Illustrative numbers only, not a real client and not advice for your facts.

Which fringe benefits are tax-free to employees and deductible by the employer?

Several fringe benefits qualify for tax-free treatment to the employee while remaining fully deductible by the employer. Health insurance premiums paid by the employer are excluded from the employee’s income and not subject to payroll taxes. Employer contributions to health savings accounts (HSAs), dependent care assistance programs (up to $5,000), educational assistance programs (up to $5,250 under IRC 127), and group-term life insurance (up to $50,000 of coverage) are all tax-free to employees. De minimis fringe benefits (occasional snacks, holiday gifts of nominal value, personal use of a copier) are excluded from income under IRC 132. For S-Corp owners who hold more than 2% of the stock, health insurance premiums must be reported as W-2 income (though the owner can deduct them on Form 1040, line 17), and other fringe benefit exclusions are generally unavailable.

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Cite this page

Yarik Yarosh, CPA. "Accountable Plans for Employee Expense Reimbursements: Tax-Free Treatment Under IRC 62." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-accountable-plan-expense-reimbursement-rules

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.

Accountable Plans for Employee Expense Reimbursements: Tax-Free Treatment Under IRC 62

How does an accountable plan save taxes for an S-Corp owner?

Which fringe benefits are tax-free to employees and deductible by the employer?

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