How Can Employee Reimbursements Save My Business Money on Taxes?

If you’re reimbursing employees informally—or not at all—you may be leaving easy, legal tax savings on the table. Done right, business expense reimbursements can be tax-free reimbursements to employees and fully deductible to the business, reducing both income and payroll taxes. The key is adopting an IRS-compliant “accountable plan” and building a practical reimbursement policy for small business that aligns with your cash flow and culture. Our advisory stance is simple: use reimbursements as a tax-efficient compensation strategy that supports growth, not as paperwork that slows it down. As we like to say, “Any CPA firm can record history. Our firm will help you build a future.” 

What is an IRS “accountable plan,” and why should I care?

An accountable plan is a reimbursement arrangement that requires: (1) a business connection for the expense, (2) substantiation within a reasonable period, and (3) return of any excess advances. Payments that meet these rules are not wages, so they’re excluded from your employees’ income and from employment taxes. If the rules aren’t met, the plan is “nonaccountable,” and the whole payment becomes taxable wages. These requirements come straight from Treasury Reg. §1.62-2 and IRS guidance. (eCFR)

How do tax-free reimbursements reduce payroll and income taxes?

Under an accountable plan, reimbursements don’t show up as wages on Form W-2, so you avoid employer FICA/FUTA on those dollars while still deducting the underlying employee business expenses. Employees avoid income and payroll tax on the same dollars—a clean win-win that protects cash flow and compliance. (eCFR)

Which business expense reimbursements qualify under an accountable plan?

Plenty of common business expense reimbursement examples qualify when properly documented: mileage, parking and tolls, airfare and lodging, business meals, professional dues, certifications/CE, tools and supplies, business use of a personal phone/internet, and more. You can reimburse actual costs with receipts, use per diem for travel, or pay mileage using the IRS standard mileage rate—whichever is easiest to administer while meeting the rules. (IRS)

What is the current mileage rate and how should I use it?

For 2025, the IRS standard mileage rate for business use is 70¢ per mile. Use contemporaneous mileage logs (apps are fine), reimburse monthly, and keep the logs with your payroll files. If you pay more than the federal rate, the excess is taxable wages; if you pay less, employees may claim actuals instead (subject to their own limits). (IRS)

Can I use per diem instead of collecting every receipt?

Yes. Per diem is allowed under accountable plan rules when you follow the federal rates and keep time, place, and business purpose. The IRS updates special per diem rates annually (effective each October 1) and adjusts the list of high-cost localities—so refresh your policy each fall to stay current. (IRS)

How do I set up a simple reimbursement policy for a small business?

Think of this as business tax planning with reimbursements—not just paperwork:

• Write it down. State that your company reimburses under an accountable plan and list covered expenses (travel, mileage, tools, home internet/phone business use, etc.). Include deadlines for submissions and for returning advances. (eCFR)
• Choose methods. Use mileage at the IRS rate, per diem for travel days, and actual receipts for other items. Keep it consistent. (IRS)
• Modernize substantiation. Electronic receipts and app-based expense reports are acceptable when they capture the same required details. (IRS)
• Integrate with payroll. Process reimbursements alongside payroll but code them separately so they’re excluded from wages and payroll tax calculations. (eCFR)

What are smart, tax-efficient reimbursement opportunities people overlook?

• Mileage vs. allowance. Switch from a flat car allowance (taxable) to cents-per-mile or a FAVR program under an accountable plan. (IRS)
• Professional tools & licenses. Reimburse required tools, software, and licenses to keep them off payroll while keeping your team equipped. (IRS)
• Connectivity. Reimburse the documented business portion of mobile/internet when employees regularly use them for work. (IRS)
• Education & credentials. When the training maintains or improves skills required in the job, reimburse it under the plan. (IRS)

What pitfalls should I avoid so reimbursements stay deductible and tax-free?

• Missing documentation. No receipts or mileage logs = taxable.
• Excess not returned. Advances must be reconciled; excess must come back within a “reasonable period.” (eCFR)
• Per diem misuse. Using the wrong rate or paying per diem when no overnight travel exists can convert payments to wages. (IRS)
• Owner-employee nuances. S-corp shareholder-employees and partners have extra rules—get tailored advice before implementing. (General principles still apply, but structures differ.) (IRS)

Illustrative client example (fictional): How a simple policy saved $18K

Case Study—Illustrative Only. “GulfTech Service Co.” had 14 field employees and paid a $300 monthly car allowance (fully taxable). We redesigned the plan to reimburse mileage at the IRS rate and added per diem for overnight travel. Over 12 months, taxable wages dropped by ~$105,000; employer payroll taxes fell by roughly $8,000; and employees took home more after-tax pay. Admin time declined because the team used an app for logs and photo receipts. (Your results will vary; this example is simplified to illustrate the mechanics.) (IRS)

Why work with an advisor—not just an accountant—on reimbursements?

An accountant records and reacts. An advisor anticipates, designs policy, and aligns reimbursements with hiring and pricing strategy so you protect margins while staying compliant. That’s our lane: we help you implement the right policy, connect it to payroll, and train your team so it sticks.

At B.A.A.P., we operate as your Trusted Business Advisory Partner—not just a CPA firm—so reimbursements become a strategic, tax-efficient compensation lever in your growth plan. Any CPA firm can record history. Our firm will help you build a future.

Want this tailored to your business? Book a call today.

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