Accountable plan
A written setup for repaying an employee's business costs. Done right, the money is tax-free and doesn't count as wages.
Say you own an S corp and use your phone for work. The company can pay you back for it without that money turning into wages. The arrangement that makes this work is called an accountable plan, and it covers any employee, including an owner-employee of an S corp or C corp.
Treas. Reg. 1.62-2 has three tests:
- Business connection: the cost came from doing work for the employer.
- Substantiation: the employee shows the employer what it was for, within a reasonable time.
- Returning excess: if an advance was bigger than the cost, the rest goes back within a reasonable time.
Pass them and the money stays out of the employee's gross income. It doesn't go on the W-2 and nothing is withheld. Fail them and the IRS treats it as wages, with income tax and payroll tax due.
S corp owners care about this the most, because they're employees of their own company. A home office, a phone, business miles: the company pays them back, deducts the cost, and the owner owes no tax on it.
A sole proprietor has no use for one. The same costs go straight on Schedule C.