As an S Corporation (S Corp) owner, you play a dual role, being both an employer and an employee of the company. Managing expenses effectively is crucial for optimizing your tax situation and maximizing tax advantages. To effectively gain the tax advantages, we will delve into the concept of accountable plans and explore their significance for S Corp owners.
Understanding Accountable Plans
An accountable plan is a set of rules that determine whether advances and reimbursements made by employers to employees are taxable. If the expenses meet the criteria of an accountable plan, they are not reported as wages on the employee’s W-2, leading to significant tax benefits for employer and employee.
Three Requirements to Validate an Accountable Plan:
- Business Connection: The expenses incurred by the employee must have a direct business connection. In other words, the expenses should be related to the employee’s job responsibilities or be incurred while performing duties on behalf of the S Corp.
- Substantiation: The employee must provide documentary evidence to substantiate the expenses claimed under the accountable plan. This includes receipts, invoices, or any other relevant documentation that verifies the business purpose of the expenses.
- Timely Return of Excess Funds: If the employee receives advances or reimbursements in excess of the substantiated expenses, they must return the surplus amount to the company within a reasonable timeframe. This ensures that employees are not benefiting financially from unaccounted funds.
Tax Advantages for S Corp Owners:
- Reducing Taxable Income: With an accountable plan in place, business expenses reimbursed to employees are not considered as taxable wages. Consequently, these reimbursements are excluded from the S Corp’s gross business revenue, reducing the overall taxable income for the company.
- Lower Individual Tax Liability: S Corp owners, being both employers and employees, can benefit personally from accountable plans. Since the reimbursements are not treated as taxable income on their W-2, they do not need to report higher wages on their individual tax returns. This helps reduce their personal tax liability, leaving more money in their pockets to invest back into the business or use for personal needs.
- Decreasing Payroll Taxes: By not including reimbursements in the employees’ taxable wages, the Social Security and Medicare taxes are not increased. This saves both the employer and the employee from higher payroll tax burdens, further enhancing the financial benefits of accountable plans.
For S Corp owners, accountable plans provide a strategic approach to managing business expenses, maximizing tax advantages, and maintaining compliance with the tax regulations. By adhering to the requirements of an accountable plan, owners can ensure that business-related expenses are rightfully deducted, reducing the tax burden for both the company and the individual. As a result, embracing accountable plans becomes a valuable practice for S Corp owners seeking to optimize their financial well-being and foster the growth of their businesses.
At Accavallo & Company, we are here to help with implementing an accountable plan for your business, or with any S Corporation questions that you may have. Please contact our office at (203) 925-9600 or [email protected]
