An accountable plan for your S corp private practice covers the cost of business expenses you pay for with personal funds. 

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That’s especially useful for mixed expenses—ones that are partly personal and partly business-related. Examples include phone and internet plans and vehicle and home office expenses.

How does an accountable plan work?

Typically, when your S corp pays for business expenses, you report them on your annual tax return (Form 1120S) and deduct them. The more you deduct in expenses, the lower your taxable income.

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When you pay for business expenses personally, with funds from your own bank account or credit card, you can’t deduct them. 

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An accountable plan serves as a routine to follow for reimbursing your personal expenditures with funds from your S corp. You pay the expense personally, report it to your S corp—providing records like invoices and proof of payment—and then transfer the funds to yourself.

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Reimbursements are not subject to payroll tax, and they’re not reported as income on your individual tax return. Your S corp deducts the reimbursement as an expense on its own tax return, reducing its tax burden.

Why use an accountable plan?

An accountable plan makes it easier to manage mixed expenses.

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For example:

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• Your phone bill is $100 per month
• You use your phone 70% of the time for business purposes
• Each month, you pay your $100 phone bill with your personal credit card
• You submit the phone bill and receipt to your S corp
• Your S corp reimburses you $70

Lower reasonable salary

Another benefit of an accountable plan is that it may help you pay yourself a lower reasonable salary.

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A lower reasonable salary means less of your personal income is subject to payroll tax (a total of 15.3%). You can take additional funds from your S corp as distributions, which are not subject to payroll tax. 

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As an example, without an accountable plan:

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• Your salary is $90,000
• You spend $10,000 each year covering business expenses with personal funds
• You and your S corp pay payroll tax on the $90,000 salary, even though you only keep $80,000 for personal use (the other $10,000 is spent on business expenses you are unable to deduct)

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With an accountable plan, however:

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• Your salary is $80,000
• You spend $10,000 each year covering business expenses with personal funds
• Your S corp reimburses you $10,000 each year and reports it as a deduction
• Your total personal income each year is $80,000, and you only pay payroll tax on that $80,000
• You take additional funds from your S corp in the form of distributions which are not subject to payroll tax

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Setting a reasonable salary can be tricky. Set it too low, and you may be subject to IRS scrutiny. Set it too high, and you pay more payroll tax than you would otherwise. It’s a good idea to consult with an accountant when setting your personal salary.

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Check out our articles on reasonable salary and how to pay yourself for a deeper dive, and for a breakdown of salary vs. distributions.

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How to set up an accountable plan for your private practice

The expenses reimbursed through your accountable plan must meet three criteria:

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• They are business related
• They are reimbursed in a timely manner
• The employee returns any unused reimbursements to the business

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Failing to meet those criteria means the IRS may determine your reimbursements invalid, and you will be liable for income tax and payroll tax on the funds you reimbursed.

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Creating an accountable plan helps avoid that problem. Here’s how to do it:

1. Determine your eligibility

Make sure:

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• Your private practice has elected S corp status
• You, the owner, are an employee on payroll
• You personally pay some business expenses (the ones that will be reimbursed)

2. Create a written accountable plan

The IRS requires you to put down your plan in writing. It doesn’t need to be long, but it does need to include:

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• A statement to the effect that your plan follows IRC Section 62(c)
• A definition of reimbursable expenses
• Substantiation requirements (invoices, receipts, logs)
• The timeframe for submission (eg. within 60 days of paying the expense)
• The requirement that excess reimbursements be returned
• The effective date of the plan

3. Set up a submission process

Each time you pay a reimbursable expense, you’ll need to submit it to your S corp. Setting up a workflow now saves time later.

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First, determine what you need to submit with each expense you report, including:

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• A monthly or quarterly expense report
• Receipts, invoices, or mileage logs
• Business use percentages where applicable (for mixed expenses)

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Then determine what your S corp will keep, and how it will be filed, including:

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• Copies of receipts, invoices, etc.
• Reimbursement approvals
• The plan document

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In most cases, you can use a simple spreadsheet (plus supporting documents like receipts) to track and record reports and reimbursements.

4. Plan how to reimburse expenses

Reimbursements are not part of your salary. They are paid separately.

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• Using payroll software, code the reimbursements as “Accountable Plan Reimbursement”
• Do not withhold payroll tax or income tax
• Do not include the payment as part of wages

5. Record each reimbursement on the books

Record and categorize each payment in your S corp’s bookkeeping system. The payment should be categorized as “Accountable Plan Reimbursement” or “Employee Expense Reimbursement.” You can include details on what the reimbursement was for in the entry notes.

6. Stay complaint

To keep your accountable plan compliant, ensuring you can continue using it:

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• Reimburse only substantiated expenses
• Do not provide flat-rate monthly stipends
• Do not round up or estimate payments
• Keep records of reimbursed expenses on file for at least seven years
• Review your plan annually

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—

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Setting up an accountable plan is just one way to potentially enjoy tax savings with your S corp private practice. For more, check out How to Maximize S Corp Status.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post. ‍

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‍Bryce Warnes is a West Coast writer specializing in small business finances.

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