Overview

For S corporation and LLC owners, an “accountable plan” is the cleanest way to reimburse owner‑employees and staff for business travel, mileage, and home office expenses without creating taxable wages. When a reimbursement arrangement meets the accountable plan rules—business connection, substantiation, and timely return of excess—payments are excluded from employee wages and employment taxes. If any requirement is missed, all payments under the arrangement become taxable wages subject to withholding, FICA, FUTA, and reporting on Form W‑2. This guide explains the rules, documentation standards, safe harbors, and practical set‑up tips—tailored for S‑Corp shareholder‑employees—so you can design a compliant plan for travel, mileage, and home office reimbursements.

• Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2: https://www.law.cornell.edu/cfr/text/26/1.62-2

• 26 CFR § 31.3121(a)-3 26 CFR § 31.3121(a)-3: https://www.law.cornell.edu/cfr/text/26/31.3121(a)-3

What is an accountable plan?

An accountable plan is a reimbursement or expense allowance arrangement that satisfies all three requirements under § 62(c) and Treasury regulations:

• Business connection: The plan reimburses only ordinary and necessary business expenses deductible under part VI of subchapter B and incurred in the course of services as an employee. If amounts are paid regardless of whether expenses are (or are expected to be) incurred, the plan fails this test and becomes nonaccountable.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(d)(1) & (d)(3)(i): https://www.law.cornell.edu/cfr/text/26/1.62-2

• Substantiation: The plan requires employees to substantiate each expense to the payor within a reasonable period. For travel, entertainment, gifts, and “listed property” (like passenger automobiles), § 274(d) requires documentation of amount, time, place, business purpose, and business relationship—supported by adequate records and receipts.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(e): https://www.law.cornell.edu/cfr/text/26/1.62-2

  • IRC § 274(d) IRC § 274(d): https://www.law.cornell.edu/uscode/text/26/274

  • Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A: https://www.law.cornell.edu/cfr/text/26/1.274-5A

• Return of excess: The plan requires employees to return reimbursements that exceed substantiated expenses within a reasonable period (safe harbors provided below).

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(f): https://www.law.cornell.edu/cfr/text/26/1.62-2

If all three are satisfied, reimbursements are excluded from wages and not subject to withholding or employment taxes; they are also not reported on Form W‑2. If any requirement is missed, all payments under that arrangement are wages subject to FICA, FUTA, and income tax withholding.

• Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(c)(4) & (c)(3), (c)(5): https://www.law.cornell.edu/cfr/text/26/1.62-2

• 26 CFR § 31.3121(a)-3 26 CFR § 31.3121(a)-3: https://www.law.cornell.edu/cfr/text/26/31.3121(a)-3

There is also an anti‑abuse rule: a pattern of abuse (e.g., routinely paying flat allowances without true substantiation or return of excess) converts the entire arrangement into a nonaccountable plan.

• Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(k): https://www.law.cornell.edu/cfr/text/26/1.62-2

Why S‑Corp owners need accountable plans

• Unreimbursed employee business expenses are generally suspended as miscellaneous itemized deductions through 2025; S‑Corp shareholder‑employees are employees. Without an accountable plan, travel, mileage, and home office costs typically cannot be deducted by the employee and will not be excludable if paid personally.

  • IRC § 62 IRC § 62: https://www.law.cornell.edu/uscode/text/26/62

  • Pub. 463 (Travel, Gift, and Car Expenses): https://www.irs.gov/pub/irs-pdf/p463.pdf

• Proper reimbursements avoid wage treatment and payroll taxes; improper plans (or missed substantiation/return of excess) trigger wage inclusion and employment taxes.

  • Treas. Reg. § 1.62‑2(c)(4), (c)(5): https://www.law.cornell.edu/cfr/text/26/1.62-2

  • 26 CFR § 31.3121(a)-3 26 CFR § 31.3121(a)-3: https://www.law.cornell.edu/cfr/text/26/31.3121(a)-3

• Owner‑employee health reimbursements must be handled carefully; paying or reimbursing individual market premiums directly is an employer payment plan subject to Affordable Care Act market reforms. Noncompliant arrangements can trigger an excise tax of $100 per day per affected employee under § 4980D.

  • Notice 2015‑17: https://www.irs.gov/pub/irs-drop/n-15-17.pdf

  • Employer health care arrangements overview: https://www.irs.gov/affordable-care-act/employers/employer-health-care-arrangements

Core documentation standards (travel, mileage, home office)

Travel away from home

To reimburse travel under an accountable plan, require documentation that satisfies § 274(d):

• Amounts for each expense (lodging must have receipts).

• Dates of departure/return and number of business days away.

• Destination (city/town).

• Business purpose of the travel.

Adequate records include an account book/expense report made at or near the time of travel, plus documentary evidence such as receipts—especially for lodging and any other expense ≥ $75 (transportation receipts may be waived if not readily available).

• Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A(b), (c): https://www.law.cornell.edu/cfr/text/26/1.274-5A

• Pub. 463: https://www.irs.gov/pub/irs-pdf/p463.pdf

Employers may adopt electronic expense reporting with electronic receipts (e.g., card feeds); done properly, this can satisfy substantiation and accountable plan rules.

• Rev. Rul. 2003‑106: https://www.irs.gov/pub/irs-drop/rr-03-106.pdf

Key concepts for travel:

• “Travel away from home” requires that duties keep the taxpayer away from the tax home beyond an ordinary day’s work and that sleep/rest is needed. Tax home is the principal place of business; itinerants have no travel deduction.

• Pub. 463: https://www.irs.gov/pub/irs-pdf/p463.pdf

Mileage and vehicle expenses

For business use of a passenger automobile, you can reimburse actual expenses (with receipts and mileage logs) or adopt the IRS standard mileage rate:

• 2024 business mileage rate: 67¢ per mile.

  • Notice 2024‑08: https://www.irs.gov/pub/irs-drop/n-24-08.pdf

• 2025 business mileage rate: 70¢ per mile (as referenced in 2025 Pub. 15‑B).

  • Pub. 15‑B (2025): https://www.irs.gov/pub/irs-pdf/p15b.pdf

Mileage reimbursements under an accountable plan still require substantiation of:

• Total business miles, date(s), and business purpose.

• Odometer readings or contemporaneous logs evidencing business use.

  • Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A(b): https://www.law.cornell.edu/cfr/text/26/1.274-5A

If you pay a mileage allowance under an accountable plan but do not require return of excess above the deemed substantiated amount for the days/miles, the excess for those substantiated days/miles is treated as paid under a nonaccountable plan and included in wages (the plan otherwise remains accountable for the portion at or below the rate). Safe harbor timing rules apply for withholding on excess amounts.

• Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(h) and (g)(2)(ii)(B): https://www.law.cornell.edu/cfr/text/26/1.62-2

Per diem allowances

Accountable plans may use per diem allowances to reimburse meals and incidental expenses (M&IE), or high‑low per diem for combined lodging/M&IE, subject to IRS rates and rules:

• Rules for per diem, transportation industry M&IE, high‑low method, and incidental‑only rate are in Rev. Proc. 2019‑48; the IRS publishes annual notices with updated rates and high‑cost localities.

  • Rev. Proc. 2019‑48: https://www.irs.gov/pub/irs-drop/rp-19-48.pdf

Employees must substantiate time, place, and business purpose (even with per diem). Excess over federal rates for substantiated days is treated as wages.

• Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(e), (g)(2)(ii)(B): https://www.law.cornell.edu/cfr/text/26/1.62-2

Home office reimbursement for shareholder‑employees

An S‑Corp can reimburse home office expenses under an accountable plan if the space meets the business use tests (exclusive and regular use; principal place of business or to meet clients) and the expenses are substantiated. Reimbursable costs include allocable portions of mortgage interest, rent, utilities, insurance, repairs, and depreciation (for owners). Require:

• A written description of the space and square footage calculations (business vs. total).

• Evidence of exclusive and regular business use (principal place of business or meeting clients).

• Monthly/annual expense documentation and allocation methodology.

See Publication 587 for the qualifying tests and cost categories. Because unreimbursed employee business expenses are suspended, shareholder‑employees should use an accountable plan rather than relying on an employee deduction.

• Pub. 587: https://www.irs.gov/publications/p587

• PDF: https://www.irs.gov/pub/irs-pdf/p587.pdf

• IRC § 62 IRC § 62: https://www.law.cornell.edu/uscode/text/26/62

Safe harbors for “reasonable period” (timing)

To satisfy “reasonable period” for substantiation and return of excess, adopt either:

• Fixed date method: Advance paid within 30 days of when an expense is incurred; substantiation within 60 days; excess returned within 120 days after the expense is incurred.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(g)(2)(i): https://www.law.cornell.edu/cfr/text/26/1.62-2

• Periodic statement method: Provide at least quarterly statements showing advances in excess of substantiated expenses, requesting substantiation or return of any excess within 120 days of the statement.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(g)(2)(ii): https://www.law.cornell.edu/cfr/text/26/1.62-2

Employment tax and reporting outcomes

• Amounts paid under an accountable plan (at or below deemed substantiated rates, properly substantiated, and with excess timely returned) are not wages, not subject to FICA/FUTA/income tax withholding, and not reported on Form W‑2.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(c)(4): https://www.law.cornell.edu/cfr/text/26/1.62-2

  • 26 CFR § 31.3121(a)-3(a) 26 CFR § 31.3121(a)-3(a): https://www.law.cornell.edu/cfr/text/26/31.3121(a)-3

• Amounts paid under a nonaccountable plan (or accountable plans where substantiation/return of excess fails) are wages subject to withholding and employment taxes when paid (or, for per diem/mileage excess, in the period specified by the timing rules).

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(c)(5), (h): https://www.law.cornell.edu/cfr/text/26/1.62-2

  • 26 CFR § 31.3121(a)-3(b) 26 CFR § 31.3121(a)-3(b): https://www.law.cornell.edu/cfr/text/26/31.3121(a)-3

• Be wary of allowances that rely on averages without employee‑level substantiation; patterns of not tracking or treating excess as wages can invalidate the plan.

  • Rev. Rul. 2006‑56: https://www.irs.gov/pub/irs-drop/rr-06-56.pdf

Special rules for S‑Corp shareholder‑employees

• Reasonable compensation: Corporate officers must be paid reasonable W‑2 wages for services; reimbursements under an accountable plan are not a substitute for wages. Paying distributions or reimbursements without reasonable wages risks recharacterization and payroll tax assessments.

  • S‑Corp officer wages: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

• Health insurance: Premiums paid by the S‑Corp for >2% shareholder‑employees are deductible by the S‑Corp but must be included in the shareholder’s Box 1 wages (not in Boxes 3 or 5) to facilitate an above‑the‑line deduction if other criteria are met. Do not reimburse individual market premiums through an employer payment plan unless you comply with ACA market reforms; noncompliance can trigger § 4980D excise taxes.

  • S‑Corp officer compensation guidance: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

  • Notice 2015‑17: https://www.irs.gov/pub/irs-drop/n-15-17.pdf

How to set up a robust accountable plan (step‑by‑step)

• Adopt a written policy defining reimbursable expenses (travel, mileage per IRS rate, home office), required documentation, timelines, and procedures for returning excess. Reference the fixed date or periodic statement method.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(g): https://www.law.cornell.edu/cfr/text/26/1.62-2

• Implement an expense reporting system (electronic or paper) that captures the elements required by § 274(d) for travel and vehicle use. Include receipt requirements (lodging receipts; $75 threshold).

  • Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A(c): https://www.law.cornell.edu/cfr/text/26/1.274-5A

• For mileage: set the reimbursement rate at the IRS standard rate; require contemporaneous mileage logs showing date, miles, origin/destination, and business purpose.

  • Notice 2024‑08: https://www.irs.gov/pub/irs-drop/n-24-08.pdf

  • Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A(b): https://www.law.cornell.edu/cfr/text/26/1.274-5A

• For per diem: choose federal M&IE per diem or high‑low method where appropriate; collect time, place, and business purpose and apply rates based on locality per Rev. Proc. 2019‑48.

  • Rev. Proc. 2019‑48: https://www.irs.gov/pub/irs-drop/rp-19-48.pdf

• For home office: define eligibility (exclusive/regular use; principal place of business), document square footage and allocation percentages, and reimburse actual costs using a clear methodology consistent with Publication 587.

  • Pub. 587: https://www.irs.gov/publications/p587

• Provide periodic statements of excess and enforce return of excess within the safe harbor window; document any amounts reclassified as wages when excess is not returned.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(g), (h): https://www.law.cornell.edu/cfr/text/26/1.62-2

• Train staff on documentation standards and audit the process to avoid abuse; a pattern of lax substantiation or ignoring excess returns can invalidate the plan.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(k): https://www.law.cornell.edu/cfr/text/26/1.62-2

Common pitfalls (and how to avoid them)

• Flat monthly “allowances” without employee‑specific substantiation or return of excess—these are wages, not accountable reimbursements.

  • Rev. Rul. 2006‑56: https://www.irs.gov/pub/irs-drop/rr-06-56.pdf

• Missing receipts for lodging or >$75 expenses, or failing to document business purpose, dates, and destinations—violates § 274(d), making the plan nonaccountable.

  • Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A(c): https://www.law.cornell.edu/cfr/text/26/1.274-5A

• Paying or reimbursing individual health premiums for shareholder‑employees without ACA‑compliant design—can trigger § 4980D excise tax.

  • Notice 2015‑17: https://www.irs.gov/pub/irs-drop/n-15-17.pdf

• Treating reimbursements as a substitute for reasonable wages—maintain a proper W‑2 salary for services.

  • S‑Corp officer wages: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

Quick reference: safe harbor timing rules

• Fixed date method: 30/60/120‑day rule (advance, substantiate, return excess).

  • Treas. Reg. § 1.62‑2(g)(2)(i): https://www.law.cornell.edu/cfr/text/26/1.62-2

• Periodic statement method: Quarterly statement; 120 days to substantiate/return.

  • Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2(g)(2)(ii): https://www.law.cornell.edu/cfr/text/26/1.62-2

Bottom line

An accountable plan is essential for S‑Corp (and LLC electing S status) owner‑employees to reimburse travel, mileage, and home office costs without creating taxable wages. Build your plan around the three pillars—business connection, substantiation, and prompt return of excess—and adopt IRS safe harbor timelines. Use IRS rates (standard mileage; federal per diem or high‑low) and enforce rigorous documentation (receipts and logs). Keep reasonable compensation separate from reimbursements and avoid unsupported allowances or non‑ACA compliant health premium reimbursements. Done right, reimbursements are excludable from wages and employment taxes—and defensible on audit.

• Treas. Reg. § 1.62 Treas. Reg. § 1.62‑2: https://www.law.cornell.edu/cfr/text/26/1.62-2

• 26 CFR § 31.3121(a)-3 26 CFR § 31.3121(a)-3: https://www.law.cornell.edu/cfr/text/26/31.3121(a)-3

• Treas. Reg. § 1.274 Treas. Reg. § 1.274‑5A: https://www.law.cornell.edu/cfr/text/26/1.274-5A

• Pub. 463: https://www.irs.gov/pub/irs-pdf/p463.pdf

• Pub. 587: https://www.irs.gov/publications/p587