Accountable plan vs. nonaccountable plan: Construction guide

The way a construction company structures reimbursements has direct tax implications for both employees and employers. It determines whether payments are categorized as tax-free expense recovery (accountable plan) or fully taxable wages (nonaccountable plan). But it’s not as simple as checking a box. 

To maintain tax-free status, a reimbursement needs to pass IRS accountable plan tests. If it fails, tax-free reimbursements immediately turn into taxable wages, and the consequences end up hurting both sides of payroll. The employer and employee each have to pay 7.65% of the wages toward Social Security and Medicare. And the employer also owes federal unemployment tax on the full amount paid. 

This guide will cover everything financial leaders and construction payroll managers need to know about the difference between an accountable plan vs nonaccountable plan.

What is an accountable plan?

An accountable plan is an expense reimbursement method in which contractors are permitted to repay employees for eligible out-of-pocket expenses tax-free. But the IRS doesn’t just take a company’s word for it.

Under IRS Reg 1.62-2, a reimbursement must meet all of the following requirements to qualify:

• Business connection: The reimbursement must be tied to an expense incurred while the employee was performing services for the company (e.g., fueling work vehicles or buying project materials).
• Substantiation within a reasonable period: Within 60 days of spending the money, employees must present documentation (such as receipts) confirming the amount, time, place, and purpose of the expense. Contractors should also tie expenses to a specific job to ensure accurate cost coding and project-based accounting.
• Return of excess within a reasonable period: If an employee is given a per diem or advance that’s higher than the actual expense, then they must repay the excess within 120 days.

When a reimbursement meets these requirements, it’s confirmed as an accountable plan. This means the repayment is excluded from W-2 wages and isn’t subject to tax withholdings, the Federal Insurance Contribution Act (FICA), or The Federal Unemployment Tax Act (FUTA). But if it fails just one of the three requirements, it defaults to a nonaccountable plan.

What is a nonaccountable plan?

A nonaccountable plan is a reimbursement structure that doesn’t meet the previously listed IRS requirements. Any payment under a nonaccountable plan is considered taxable income, and employers add the expense to W-2 Box 1. In this case, reimbursements are subject to payroll and income tax.

Nonaccountable plans don’t require any documentation or return of excess. Even if an expense is directly connected to the business, without receipts, mileage logs, or return of excess, the entire payment is treated as fully taxable.

Most of the time, contractors don’t intend for reimbursements to be nonaccountable. This usually happens because a reimbursement practice has simply failed at least one IRS test, which often results from some common industry-specific errors:

• Paying a flat monthly truck allowance without mileage logs
• Paying a per diem above the federal General Services Administration (GSA) rate (the excess becomes taxable wages) or paying a per diem without documentation of travel days
• Submitting an expense report after the 60-day safe harbor
• Employees failing to return excess funds within 120 days
• Paying flat tool allowances without itemized receipts

Making these mistakes adds up. Say a company gives each of its supers a $6,000 annual truck allowance. If that payment is treated as taxable, the employer is responsible for paying an additional $450–$500 in payroll taxes for each super, and that’s before variable state unemployment taxes.

Comparing accountable and nonaccountable plans

Both accountable and nonaccountable plans have meaningful implications for contractors regarding tax and payroll compliance. Here’s a clear breakdown between these approaches.

How to establish an accountable plan: 7 key steps

Paying construction crews can already feel like a compliance minefield between managing complex employee benefits, dealing with variable pay rates, and tracking state overtime laws. A clear reimbursement policy keeps per diems, mileage, and tool repayments out of that compliance mess.Here are seven steps for creating a reimbursement plan that works.

1. Define eligible reimbursable expenses.

Create a list of qualified business expenses, such as those for jobsite travel, tools, safety gear, and meals. Share this list with employees so they know what purchases they’ll get refunds for.

2. Set substantiation and documentation requirements.

Require employees to properly keep and submit receipts, logs, and other documents to ensure finance teams can substantiate each and every expense. 

Some companies keep paper logs, but it takes a lot more time to organize these files, and it’s more likely that teams will lose receipts or make reporting mistakes when managing documentation by hand. Other contractors prefer pairing corporate cards with software that automatically captures receipts and ties expenses directly to the right project. 

3. Establish submission timelines.

Create reasonable deadlines for employee submissions. They must align with the 60-day IRS safe harbor to prevent late submissions, but as a buffer, finance teams can always require workers to turn logs in earlier.

4. Define rules for returning excess reimbursements.

Clearly explain that employees must return excess funds from advances or per diems within 120 days to comply with IRS rules. Like the document submission timelines, finance teams can set shorter deadlines to protect the company from late submissions.

5. Apply IRS safe harbors to per diems, mileage, and tool reimbursements.

Reimburse employees according to IRS rules:

• Per diem for traveling crews: Pay at or below the GSA federal rate. That means workers don’t have to provide itemized meal receipts as long as they document time, place, and business-related purposes. Any portion paid above the GSA rate becomes taxable wages.
• Mileage for personal vehicle use: Repay workers who use their personal vehicles for jobsite travel at the IRS standard mileage rate. Ensure workers keep an accurate log of miles for specific projects. Note that regular daily commutes don’t count toward mileage reimbursements.
• Employee-owned tools: Reimburse tool expenses against actual receipts. Flat monthly tool allowances are considered taxable wages under IRS Rev. Rul. 2005-52.
  

6. Create a written reimbursement policy.

While the IRS doesn’t require it, contractors should create a written policy. This documentation standardizes the accountable plan reimbursement processes and acts as evidence in the event of an audit.

7. Configure the payroll system to match company policy.

Failures usually happen because of system configuration issues rather than the policy itself. Set up payroll and HRIS systems so they flag payments at the category level. This step ensures employers classify allowance and reimbursements correctly.

Skipping this step is costly for both employers and employees. Say a per diem is nontaxable but gets flagged as taxable wage in the payroll system. The payment shows up in the employee’s W-2, leaving both them and their employer on the hook for payroll taxes and FICA matches.

Improve reimbursement management and compliance.

To stay compliant, construction companies need clear policies, documentation, and payroll processes that align with IRS requirements.

Miter helps contractors manage their expenses. Workers submit reimbursements through the mobile app right after making a purchase. They choose which category the expense falls into, and Miter fills in the related general ledger account, cost type, and taxability status. Admins can configure per diem rates at the amount of their choosing (including the federal GSA rate), tied to a category that controls cost coding, payout method, and taxability. For mileage, team members enter start and stop locations in the Miter mobile app, and Miter calculates the driving distance automatically using Google Maps.

Finance leaders set approval and payout rules so fewer expenses need manual review. Approved reimbursements are added to the next paycheck automatically, or admins can submit them for ACH payout directly from the platform. Payroll teams don’t need to check each and every expense, and workers no longer have to wait weeks for their reimbursements.