Many business owners reimburse employees for vehicle use. Mileage is tracked, a check is cut, and it’s assumed the reimbursement is non-taxable. Unfortunately, that assumption often creates unintended payroll tax exposure. Mileage reimbursement alone is not enough. Without a formal accountable plan, those payments can easily be reclassified as taxable wages.

The Problem

Auto expense reimbursements are commonly handled informally, especially in closely held businesses. An owner or employee submits mileage, the company reimburses it, and no further documentation or structure is put in place. This issue is especially common in closely held and owner-managed businesses, where reimbursements are often handled informally, and administrative processes tend to be streamlined for speed rather than compliance. These companies are at the highest risk for audit exposure when reimbursement practices lack structure.

The issue is that the IRS does not look at intent. It looks at the process. Without a written policy and consistent substantiation, reimbursements may fail to meet accountable plan rules. When that happens, those payments are treated as compensation rather than expense reimbursements, which brings payroll taxes, penalties, and interest into play. This exposure often isn’t discovered until an audit, when it’s too late to fix retroactively.

What is an accountable plan?

An accountable plan is a simple, written policy that allows businesses to reimburse legitimate business expenses without treating them as taxable income. To qualify, the plan must follow three core principles:

1. Expenses must have a clear business purpose.
2. Employees must adequately substantiate those expenses.
3. Any excess reimbursement must be returned within a reasonable timeframe.

When these rules are followed, reimbursements (such as vehicle mileage) can be excluded from wages for income and payroll tax purposes.

Why does it matter?

Without a compliant accountable plan in place, reimbursements can be reclassified as taxable wages during an IRS or state audit. That reclassification doesn’t just affect income tax; it also triggers employer and employee payroll taxes, plus penalties and interest.

For businesses with multiple employees or several years of reimbursements, the dollar impact can add up quickly. What felt like a routine, low-risk practice can turn into a costly compliance issue.

An accountable plan is not about maximizing deductions. It’s about protecting reimbursements that should already be non-taxable and making them defensible.

What Proper Implementation Looks Like

A compliant accountable plan does not need to be complicated, but it does need to be intentional and consistently followed. Proper implementation typically includes:

• A written, approved policy that clearly defines reimbursable expenses
• Clear communication and training for employees who use vehicles for business
• Reliable mileage tracking and documentation
• Defined timelines for submitting expenses and returning excess reimbursements
• Payroll configured to ensure compliant reimbursements are excluded from taxable wages
• Ongoing record retention and periodic review

When these elements work together, reimbursements remain non-taxable and defensible both in day-to-day operations and under audit.

How Lutz Can Help

At Lutz, our Client Advisory Services helps clients implement accountable plans using a structured, repeatable framework. We assist with drafting the written plan, aligning payroll and expense processes, training employees on documentation requirements, and maintaining audit-ready records. We also help ensure policies stay current as IRS mileage rates and guidance change.

The result is clean execution and risk prevention. Auto reimbursements stay non-taxable, payroll exposure is reduced, and business owners can move forward with confidence that the process will hold up if reviewed. Contact us to learn more.