S‑Corporation Travel Expensing: 3 Approaches

An S corporation has three common ways to cover owner‑employee business travel: (1) the company pays travel vendors directly (corporate card or direct billing), (2) the company reimburses actual out‑of‑pocket costs under an accountable plan, or (3) the company reimburses via a per diem allowance (standard or high–low). All three methods can be tax‑efficient if they meet the accountable plan rules—business connection, adequate substantiation, and timely return of excess. If those rules are not met, amounts become taxable wages subject to withholding and employment taxes. This guide compares the methods, outlines optimization steps, and flags when taxes are triggered, with links to official IRS guidance. Publication 463

Core Tax Rules That Govern Travel Payments

• Ordinary and necessary business travel “away from home” is deductible when properly substantiated; special rules apply to meals, lodging, and recordkeeping. See the IRS’s detailed travel rules, including what to substantiate (amount, time, place, business purpose). Publication 463

• An accountable plan requires: (1) business connection (the expenses would be deductible if paid by the employee), (2) adequate accounting (substantiation) within a reasonable time, and (3) return of excess within a reasonable time; IRS publications explain how these rules work in practice. Publication 463; Publication 15‑B

• Safe‑harbor timing: use either the fixed‑date method (advance within 30 days; substantiate within 60 days; return excess within 120 days) or the periodic‑statement method (quarterly statements; substantiate/return excess within 120 days). Publication 463

• If accountable plan rules are met, payments are excluded from wages and not subject to employment taxes; if not, amounts are taxable wages subject to withholding and employment taxes. IRS publications describe wage treatment and reporting for taxable vs. nontaxable travel reimbursements. Publication 463; Publication 15‑B

• Per diem allowances may be used to substantiate meals and incidental expenses (M&IE), and under the “high–low” method may also cover lodging; any amount paid above applicable federal rates is taxable. The IRS explains per diem rules and reporting, and references annual rate tables. Publication 463

Option 1: Company Pays Travel Costs Directly (Corporate Card or Direct Billing)
How it works

• The S corporation pays vendors directly (e.g., airfare, hotels, rental cars) or via a corporate charge card. When payments are for bona fide business travel and adequately substantiated, they are treated similarly to reimbursements under an accountable plan. Publication 463

Tax outcome

• If the business connection and substantiation requirements are met, there is no taxable wage to the owner‑employee; the corporation deducts the expenses (meals subject to applicable limitations). Publication 463

• If expenses are not substantiated (or are personal), the amounts must be treated as paid under a nonaccountable plan—taxable wages subject to withholding and employment taxes when paid (or after the “reasonable period”). Publication 463; Publication 15‑B

Optimization notes

• Use a written travel policy that requires receipts for lodging and adequate records for all travel elements (date, place, business purpose); Publication 463 details adequate records and when receipts are required. Publication 463

• Treat corporate card charges as advances and reconcile on expense reports; leverage safe‑harbor timing (fixed‑date or periodic‑statement) to define a “reasonable period.” Publication 463

• Employer‑paid travel is administratively simple and typically minimizes payroll tax exposure, provided substantiation is enforced. Publication 463

Option 2: Reimburse the Owner for Actual Costs (Accountable Plan)
How it works

• The owner submits an expense report with receipts and sufficient details (amount, time, place, business purpose). The corporation reimburses the actual costs. Publication 463

Tax outcome

• Under an accountable plan, reimbursement equal to substantiated expenses is excluded from wages and not subject to employment taxes; no Form W‑2 wage inclusion is required. Publication 463; Publication 15‑B

• Reimbursement above substantiated amounts, or late substantiation/return of excess, must be treated as wages under a nonaccountable plan. Publication 463; Publication 15‑B

Optimization notes

• Require receipts for lodging and any individual expenditure ≥$75 (with exceptions for certain transportation items); document business purpose and timing for all items. Publication 463

• Enforce the safe‑harbor timing (for example, substantiate within 60 days and return excess within 120 days under the fixed‑date method). Publication 463

• Report only taxable excess in wages when applicable; amounts substantiated under an accountable plan are not wages. Publication 463 also explains employer reporting (such as Box 12 code “L” when applicable for certain nontaxable reimbursements). Publication 463

Option 3: Reimburse Per Diem (Standard or High–Low)
How it works

• The corporation pays a per diem allowance for travel away from home. Common approaches include:

  • Standard M&IE per diem (using GSA/IRS tables), with lodging reimbursed at actual amounts; or

  • High–low per diem, which uses a single “high” rate for designated localities and a “low” rate elsewhere, covering lodging plus M&IE.

• The IRS publishes annual guidance recognizing federal rates and the high–low method; taxpayers must still substantiate time, place, and business purpose. Publication 463

Tax outcome

• If the allowance is paid under an accountable plan and does not exceed the applicable federal per diem for the locality and dates, the per diem is treated as deemed substantiated for amount; time, place, and business purpose must still be documented. Publication 463

• Any per diem amount paid in excess of federal M&IE or high–low rates is taxable wages and subject to withholding and employment taxes. Publication 463; Publication 15‑B

• Per diem within federal rates is excluded from wages when accountable plan rules are satisfied; any “excess” is included in wages in the payroll period when reimbursed (or when the travel days are substantiated if paid as an advance). Publication 463

Optimization notes

• For frequent, routine destinations, the high–low method simplifies administration while preserving wage exclusion—use the IRS’s annual notice/list of designated “high‑cost” localities and rates. Publication 463

• Require employees (including owner‑employees) to substantiate the days, locality, and business purpose; per diem deems the amount substantiated, but time/place/purpose are still required. Publication 463

• Monitor rates annually and adjust allowances to avoid taxable “excess.” Publication 463

• When lodging costs vary widely, consider per diem only for M&IE and reimburse lodging at actual cost to minimize the chance of an “excess” wage inclusion. Publication 463

Special Notes for S‑Corp Owner‑Employees

• Corporate officers are employees; wages must be properly reported and taxed, and the IRS expects “reasonable compensation” for services. See IRS guidance on officer pay considerations. Paying Yourself (IRS); IRS S Corporations

• Health insurance and certain fringe benefits for >2% shareholders have special reporting, but accountable plan travel reimbursements (or employer‑paid travel) are generally excludable from wages when rules are met. Publication 15‑B

• Ensure reimbursements are paid under a formal accountable plan policy; otherwise, amounts risk recharacterization as wages or disguised distributions, increasing payroll tax exposure. Publication 463; Publication 15‑B

Payroll and Reporting Mechanics

• Accountable plan amounts (actual expense or per diem up to federal rates) are excluded from Form W‑2 wages; only “excess” amounts or nonaccountable‑plan payments are included in wages and subject to withholding and employment taxes. Publication 463; Publication 15‑B

• Employers may report certain nontaxable travel reimbursements (e.g., mileage/per diem up to federal rates) in Box 12 code “L” when applicable (see Publication 463 for accountable plan reporting references). Publication 463

• Use safe‑harbor timing to control when “excess” becomes wages (no later than the first payroll period following the end of the reasonable period). Publication 463

Choosing Among the Three Methods

• Company‑paid travel is administratively simple and often the lowest payroll‑tax risk—ideal if you have strong expense controls and timely substantiation. Publication 463

• Actual out‑of‑pocket reimbursement under an accountable plan offers precision and clear wage exclusion when receipts and records are managed; it is well‑suited to variable lodging/transport costs. Publication 463

• Per diem (standard or high–low) optimizes administration for frequent travel, with built‑in amount substantiation; just avoid exceeding federal rates to prevent taxable “excess.” Publication 463

Practical Optimization Checklist

• Adopt a written accountable plan covering travel, per diem, and card usage; cite safe‑harbor timing and required documentation. Publication 463

• For per diem, use IRS/GSA rates and the annual high–low locality list; regularly validate localities and seasonal “high‑cost” windows. Publication 463

• Require receipts for lodging and ≥$75 expenses; keep contemporaneous logs for amount, time, place, and business purpose. Publication 463

• Monitor advances and enforce return of excess within 120 days; otherwise, treat as wages in the next payroll. Publication 463

• Train owner‑employees that travel reimbursements are separate from “reasonable compensation,” and ensure officer wages are properly handled. Paying Yourself (IRS); IRS S Corporations

This essay is not tax advice. Always consult a qualified tax professional for your specific situation.