A nonaccountable plan is a simple way employers pay back employees for work expenses. But here’s the catch: these payments count as taxable income. This means you pay taxes on this money, just like your regular pay.
Unpacking the Nonaccountable Plan
So, what exactly is a nonaccountable plan? It’s when your employer gives you money for things like travel or other work costs. But they don’t ask you to show receipts or prove what you spent the money on. Think of it as a flat allowance. They just hand over the cash.
This is different from an accountable plan. With an accountable plan, you have to keep track of your spending, show your employer your receipts, and give back any money you didn’t use. The IRS has strict rules for accountable plans. These payments are usually not taxed because you’re just getting back money you spent for the company.
Why Nonaccountable Plans Are Taxed
The IRS sees payments from a nonaccountable plan differently. Because you don’t have to show proof of spending or return leftover money, the IRS treats this as extra income for you. It’s like getting a bonus. That’s why this money is taxable.
Here’s how it works:
- The employer pays you.
- You don’t provide receipts.
- You don’t return any extra money.
- The IRS counts this money as wages.
This means the money from the nonaccountable plan gets added to your regular pay. It’s then subject to federal income tax, Social Security tax, and Medicare tax.
Key Differences: Accountable vs. Nonaccountable Plans
Understanding the difference is crucial. Let’s look at a simple comparison:
| Feature | Accountable Plan | Nonaccountable Plan |
|---|---|---|
| Requires Documentation (Receipts) | Yes | No |
| Must Return Excess Reimbursements | Yes | No |
| Taxable to Employee | No | Yes (reported on W-2) |
As you can see, the main points are about showing proof of spending and returning money you don’t use. If you don’t do these things, your employer is using a nonaccountable plan, and the money is taxed.
How Nonaccountable Plan Payments Show Up on Your W-2
Because payments from a nonaccountable plan are considered wages, your employer must report them on your W-2 form. You will see this money included in Box 1, which shows your total wages, tips, and other compensation. This means you’ve already paid taxes on this amount throughout the year through payroll deductions, or you might owe more when you file your tax return if enough wasn’t withheld.
The IRS is clear on this. Their guidance states that payments made under a nonaccountable plan are wages and must be correctly reported and taxed. This is different from how they view payments from a proper accountable plan.
Impact on Employees: More Taxes Out of Your Pocket
For you as an employee, a nonaccountable plan is generally less favorable. Why? Because you lose the tax benefit of getting reimbursed for legitimate business expenses without that money being taxed.
