Tax expert Eva Rosenberg explains why it’s important to create an accountable plan in light of the elimination of the deduction for employee business expenses in the Tax Cuts and Jobs Act.
Why You Should Set Up an Accountable Plan
There is a lot of furor about the provision in the Tax Cuts and Jobs Act that totally eliminates the deduction for employee business expenses. (Along with most other miscellaneous deductions).
This column is directed to employers. You have employees who are valuable to you. They perform indispensable services – like selling your product out in the field, or providing on-site customer service and training, or working from home to save you rent and overhead. You may have been paying them enough compensation to avoid having to reimburse their out of pocket expenses until now. Those days are over.
It’s time to restructure how you pay your employees who have been relying on deducting their out-of-pocket costs. This isn’t going to be easy. New systems must be put into place for both you and your employees to follow. New compensation structures must also be established.
What Are Your Options?
One way to make things easier, from the employer point of view, is to cut these people loose to form their own companies. But keep in mind that the employees lose so much in the process that you would need to increase their freelance compensation by nearly 50% to make it worthwhile for them to pick up all the extra costs of running a business.
The other option is to establish a reimbursement policy for all of the out-of-pocket expenses that your employees have been covering on their own. First, start by reducing the employees’ compensation. Each person may have different spending needs to achieve their sales or training targets. As a result, you will need to change each individual’s base compensation by different amounts.
Creating an Accountable Plan
With an accountable plan, employees submit a regular (weekly or monthly) expense report, showing all the mileage and expenses, with receipts attached. Then you issues checks to employees, that are separate from payroll. These reimbursements are not taxed to employee and you can deduct them. The other upside to your business is a reduction in gross payroll costs. That means lower FICA/Medicare costs, workers compensation costs, and any other costs that are tied to compensation.
The benefits to your employees are also lower FICA/Medicare costs, not needing to itemize their tax returns, getting the full benefit of the higher standard deduction, and a reduced audit risk. The downside to employees is that they must submit their expense reports within a finite time (usually 90 days) or lose their reimbursements.
The Bottom Line
By adjusting the compensation properly, employees will still earn just about same amount as before (including bonuses) for reaching targets and you will spend close to the same amount. The cost of the additional paperwork will be offset by your payroll-related savings.
Yes, it’s complicated. But your comptroller or tax professional can help you. Or you can set up a consultation with TaxMama to help you set up the plan.
Known as TaxMama®, Eva Rosenberg’s frankness, sense of humor and casual, chatty delivery makes her a welcome talk show guest and speaker around the country. An Enrolled Agent, licensed by the IRS and the U.S. Treasury Department, Eva is the publisher of TaxMama.com, and the author of Small Business Taxes Made Easy. Her TaxQuips podcasts also keep people entertained and informed.