Unlock Tax-Free Reimbursements with an ARP
For Business Owners & Employees
An Accountable Reimbursement Plan (ARP) is a game-changing tool that allows your business to reimburse employees for legitimate expenses tax-free. That's right - no more taxable wages, just smart, compliant reimbursements that benefit your bottom line.
Without a proper ARP in place, those reimbursements could be classified as taxable wages and subject to payroll taxes. Don't let that happen to your business!
Step-by-Step Guide to Implementing an Accountable Plan
Follow these essential steps to create and implement your Accountable Reimbursement Plan (ARP):
1
Draft Written Policy
Create a comprehensive document that outlines your ARP rules and requirements
  • Define eligible expenses
  • Specify documentation needs
  • Set submission timeframes
  • Include excess reimbursement rules
2
Define Documentation Standards
Establish clear documentation requirements for:
  • Receipts and invoices
  • Mileage logs
  • Expense reports
  • Supporting documents
3
Set Time Requirements
Establish clear deadlines:
  • 60 days for expense submission
  • 120 days for returning excess amounts
  • Regular review periods
Example Policy Language: "Employees of [Your Company Name] may submit business expenses for reimbursement, including mileage, home office costs, office supplies, and mobile phone expenses. All reimbursements require proper documentation and must be submitted within 60 days. Any excess reimbursement must be returned within 120 days to remain tax-free."
What Expenses Can Be Reimbursed?
Learn which expenses your company can pay back and what paperwork you need.
🚗 Driving Costs
$0.67 per mile in 2024 (example: $67 for 100 miles)
Required Documentation:
  • When and where you drove
  • Miles tracked by app or log
🏠 Working From Home
Dedicated work space (10% of home)
Monthly Rent of $2,000
Monthly Electric is $50
Monthly payment example: $215
Calculation Example:
  • Rent: $2,000 × 10% = $200/month
  • Electric: $150 × 10% = $15/month
Required Documentation:
  • Rent or mortgage statement
  • Power and internet bills
  • Room size calculation
💻 Work Tools & Equipment
Eligible Items:
  • Office supplies
  • Software
  • Computers
  • Phone costs
Required Documentation:
  • Store receipt
  • How it's used for work
Set Up a Submission & Approval Process
Your ARP should require employees to submit an expense report with supporting documentation within a specific timeframe (e.g., 60 days).
Best Practices for Submission
Digital Tools
Use Google Forms, spreadsheets, or an expense-tracking app (e.g., Expensify, QuickBooks).
Documentation Required
Employees must submit receipts, logs, or written explanations with each report.
Processing Timeline
The employer should approve requests and process reimbursements within 30 days.
Example Submission Process for Mileage
1
Track
Employee tracks mileage using a log or app.
2
Submit
Employee submits the Mileage Reimbursement Form with total miles.
3
Review
Employer reviews and approves reimbursement.
4
Pay
Reimbursement is paid via ACH, check, or payroll (marked as non-taxable).
Process Reimbursements Correctly (Tax-Free)
To avoid payroll taxes, follow these IRS guidelines:
Document Everything
Only reimburse documented expenses with proper receipts and forms
Separate Payments
Keep reimbursements separate from salary payments
Return Excess
Require excess reimbursements to be returned
Example: Laptop Reimbursement Process
1
Purchase
Employee buys a $1,200 laptop for business
2
Documentation
Submit receipt and Expense Reimbursement Form
3
Approval
Employer approves and reimburses $1,200
4
Tax-Free
No payroll taxes apply since it's a business expense
Maintain Records for IRS Compliance
To protect your business in case of an audit, keep records for at least 3 years.
Digital Storage
Receipts & mileage logs should be scanned and stored digitally (Google Drive, Dropbox).
Expense Tracking
Use expense tracking software (QuickBooks, Expensify) for easier record-keeping.
Employee Reports
Require employees to submit detailed expense reports.
Action Item:
Set up a digital or physical folder to store all expense records.
Avoid Common IRS Pitfalls
If reimbursements don't meet IRS guidelines, they may be treated as taxable wages.
Payroll Tax Issues
Additional payroll taxes will be owed by both employer and employee
Employee Impact
Employees face increased taxable income on their returns
IRS Penalties
Business may face significant penalties for misclassification
✅ Compliant Example
  • Employee submits mileage logs and receipts for a $500 business expense
  • Employer reimburses only the actual documented expenses
  • No payroll taxes apply
❌ Non-Compliant Example
  • Employer gives an employee $500 per month without requiring receipts
  • IRS reclassifies the payments as wages, making them taxable
1
Document Everything
Collect all receipts and logs
2
Verify Expenses
Match receipts to claims
3
Maintain Records
Store documentation securely
Final Summary & Next Steps
1
Step 1: Draft Your ARP Policy
Create a comprehensive written policy that outlines your accountable reimbursement plan.
2
Step 2: Define Eligible Expenses & Documentation
Clearly specify which expenses qualify and what documentation is required.
3
Step 3: Set Up Submission & Approval Process
Establish a clear workflow for expense submissions and approvals.
4
Step 4: Process Reimbursements Correctly (Tax-Free)
Ensure all reimbursements follow IRS guidelines for tax-free treatment.
5
Step 5: Maintain IRS-Compliant Records
Keep detailed documentation of all expenses and reimbursements.
6
Step 6: Avoid Common IRS Pitfalls
Follow best practices to maintain compliance and prevent tax issues.
Want Expert Help? Choose a Setup Package
We offer full implementation services if you want to ensure your ARP is set up correctly and maximize your tax savings.
Basic Package
$250
One-Time Setup
  • Full customized ARP policy & documentation
  • Implementation with timelines & forms
  • Ongoing first-year support & guidance
Premium Package
$650
Retroactive Unlock & Setup
  • Everything in the $250 package
  • Retroactive analysis of past expenses looking at salaries, distributions, and business operational activities to unlock otherwise disallowed reimbursement to become fully deductible and nontaxable
  • Drafting reimbursement reports for prior tax year