As S corporation owners are required to take a reasonable W-2 wage, they become dual status members of the company – owner and employee. While other business entity types have arrangements on how owners can deduct employee expenses they pay personally (and are later reimbursed by the company or paid directly by the company), S corporations must follow specific guidelines on how they pay and report these expenses.

The risk of not having an accountable plan can be costly; reimbursements of owner-employee business expenses must be included in the employee’s W-2 and subject to payroll taxes in addition to increasing the owner-employee’s income tax base. The expense can still be deducted at the S corporation level but you lose the benefit by including in the owner-employee’s income.

What kind of expenses do S corporation owners typically pay (or have the company pay on their behalf)?

Typical owner-employee expenses are home office, mileage, cell phone, internet, continuing education, travel, meals and lodging. Expenses must be ordinary and necessary and some expenses are subject to additional record-keeping requirements, for example mileage and meals.

What requirements does an accountable plan need to include?

Accountable plans must include that payments that are paid or incurred by an employee are made in connection with the performance of services as an employee of the company. Additionally, payments must be substantiated – certain payments require higher substantiation than others (think of the types of expenses that are more likely to be abused as personal expenses like meals and mileage), but all expenses must be substantiated by information that enables the S corporation to identify the specific nature of each expense and to conclude that the expenses is attributable to the payor’s business activities. So, an itemized receipt could likely suffice here. Lastly, if reimbursements are made, excess amounts must be returned to the S corp if amounts are in excess of the substantiated expenses.

Other items to consider

S corporations should not pay flat monthly amounts to owner-employees, but rather the exact amounts of the expenses incurred. Once an accountable plan is drafted, it should be signed by the owner(s) of the S corporation and kept with other corporate documentation like the articles of incorporation/organization, bylaws/operating agreement, S corporation election and S corporation acceptance letter. The records of reimbursed owner-employee expenses such as receipts and mileage logs should be kept for 7 years.

Please fill out the contact form on the Contact page here if you’d like to learn more about accountable plans and other S corporation requirements.