As a general contractor, you likely have multiple employees at multiple worksites incurring expenses related to meals, communications, travel, accommodations, and more. It’s important to understand your responsibilities and tax-related options for these expenses, and how they impact employees.
In general, you can handle expenses using an accountable plan and/or a non-accountable plan.
With an accountable plan, reimbursement for eligible expenses is not treated as part of payroll, so they aren’t taxable for you or your employees. What’s more, you get to deduct payments made to employees as a business expense (meal expenses are subject to the 50% limit). To qualify, an accountable plan must meet all of these criteria:
- Exist to reimburse employees for allowable business expenses paid or incurred in their performance of services as employees;
- Clearly identify plan payments;
- Require any expense being reimbursed to be substantiated with information about the amount, time, place, and purpose of the expense; and
- Require employees to return any portion of an allowance for days or miles of travel not substantiated within a reasonable time.
An accountable plan allows you to reimburse eligible expenses directly, per diem (at or below rates set by the U.S. General Services Administration each fiscal year – otherwise, amounts above those rates are treated as taxable income – and only for certain types of expenses), or with company assets.
If the arrangement does not meet all of the accountable plan criteria, it is considered a non-accountable plan. In this case, you provide a flat dollar allowance for expenses. Employees do not have to account for how the allowance is used (so no expense accounts or receipts are required). Sounds simple, but there are trade-offs.
The allowance is considered part of compensation. You can deduct it as part of payroll, but you are also on the line for withholding and FICA taxes. What’s more, any pay-related coverage like workers’ compensation insurance may cost more to reflect the additional “pay.” For employees, the allowance is considered taxable income and appears on their W-2s. Through 2025, employees cannot deduct any of these expenses on their personal income tax returns.
Important Note! You can no longer claim any miscellaneous itemized deductions that are subject to the 2%-of-AGI limitation, including unreimbursed employee expenses.
In addition to understanding the different types of business expense reimbursement plans, it’s important to know that there are a lot of rules for different types of expenses. Take mileage, for example. Not all miles for work-related travel are reimbursable. Instead, eligibility depends on whether work is at a regular workplace (a place where an employee performs work for longer than a year); a temporary workplace (work is expected to be performed for a year or less); an indefinite workplace (work is expected to take more than a year); or multiple locations.
Mileage is considered an eligible business expense for:
- Travel from an employee’s regular work location to a temporary work location
- Travel from home to a temporary work location if the employee has a regular work location
- Travel between multiple work locations
Mileage is not considered an eligible business expense for:
- Travel between an employee’s home and regular work location
- Travel from home to a temporary work location if the employee has no regular work location (unless travel is outside of the normal work area)
If a company-owned vehicle is provided for travel, a whole other set of considerations apply. There are also several layers of rules for the reimbursement and tax treatment of lodging and fringe benefits.
One closing thought – having the right software solution (i.e., Expensify, Docyt, and Navan) to help your employees track and submit receipts and expenses is critical. Without proper documentation, an income tax or workers’ compensation audit may lead to the identification of expense reimbursements as additional employee compensation.
Your current and future business plans and goals play an important role in determining how to handle employee expenses. RBT CPAs business advisory and tax professionals are available to work with you to evaluate your options and determine the best strategy for your business and employees. Let us know if you want to get the process started and see how we can be Remarkably Better Together.
RBT CPAs is proud to say 100% of its work is prepared in America. Our company does not offshore work, so you always know who is handling your confidential financial data.