Law Firm Accountable Plans | Kathryn Meyer Law PC

An accountable plan is a written reimbursement arrangement that meets three rules in Treasury Regulation 1.62-2: the expenses must be business expenses, employees must substantiate them, and any excess must be returned within a reasonable period. Amounts paid under a plan that meets those rules are not wages, so they stay off the Form W-2 and free of payroll tax. Payments under a plan that misses any rule are taxable wages.

For law firm owners who work as employees of their own S corporation or professional corporation, the plan is usually the only clean way to get firm expenses they paid personally back out of the firm. It is a regular part of Kathryn Meyer's work on tax planning for law firms.

How an accountable plan works, step by step

The firm adopts a written policy. It covers only expenses employees pay or incur while performing services for the firm that would be deductible business expenses, which is the business connection rule in Treas. Reg. 1.62-2(d).
The employee pays a firm expense, such as travel to a deposition, a filing fee advanced on a firm card, or mileage to a client meeting, or receives an advance reasonably calculated not to exceed the expected cost.
The employee accounts for it. For travel, gifts and vehicles that means the amount, time, place and business purpose required by section 274(d). For other expenses it means enough detail to identify the specific nature of each expense; broad labels like "miscellaneous business expenses" are not enough under Treas. Reg. 1.62-2(e)(3).
The firm reviews and reimburses the substantiated amount, paid separately from salary or separately identified if combined in one payment.
The employee returns any excess advance within a reasonable period.
The firm keeps the file. The reimbursement is left off the W-2, and the firm deducts the expense itself, subject to limits such as the 50 percent cap on most business meals.

What counts as a "reasonable period"?

The regulation says a reasonable period depends on the facts and circumstances, then gives two safe harbors in Treas. Reg. 1.62-2(g)(2). Publication 463 (2025) repeats them in plain terms. A firm can pick either one and write it into the policy.

Safe harbor	Advance	Substantiation	Return of excess
Fixed date method	Made within 30 days of when the expense is paid or incurred	Within 60 days after the expense is paid or incurred	Within 120 days after the expense is paid or incurred
Periodic statement method	Not fixed	The firm sends statements at least quarterly listing unsubstantiated amounts; the employee substantiates within 120 days of the statement	Within 120 days of the statement

Under Treas. Reg. 1.62-2(h)(2)(i)(A), a firm may treat anything not substantiated or returned within those periods as paid under a nonaccountable plan, which means it becomes wages subject to withholding no later than the first payroll period after the period ends. And under Treas. Reg. 1.62-2(g)(3), a firm with a plan or practice of overpaying employees and not reporting the excess loses both safe harbors for every year the practice exists.

Why it matters more for owners than for staff

Publication 463 (2025) explains that most employees can no longer deduct unreimbursed employee business expenses on their own returns, because miscellaneous itemized deductions subject to the 2 percent floor are suspended for tax years beginning after 2017. An owner who is on the payroll of an S corporation, and who pays for firm travel or software personally without being reimbursed, generally gets no deduction for it at all. A reimbursement through a compliant plan moves the expense back to the firm, where it is deductible, without turning it into salary. That keeps the owner's W-2 equal to the salary the firm actually decided on, which matters when the IRS looks at how much salary an S corporation owner should take.

The rules are different for other structures. Publication 463 says a sole proprietor reports business expenses directly on Schedule C and does not use Form 2106, so no reimbursement plan is needed. The Instructions for Schedule E say a partner may deduct unreimbursed ordinary and necessary partnership expenses on Schedule E only if the partnership agreement required the partner to pay them. If you are still deciding on a structure, the trade-offs are in our post on when a solo or small firm should elect S corporation status.

What changes the answer

Whether the payment depends on actual expenses. If the firm pays a set amount whether or not the employee incurs business expenses, the whole arrangement is nonaccountable under Treas. Reg. 1.62-2(d)(3)(i). The regulation's own example is an employer that labels part of a fixed daily pay rate as a travel reimbursement; all of it is wages.
Whether the expense is deductible. Publication 463 says reimbursements for nondeductible expenses, such as meals when an employee works late at the office but is not away from home, are treated as paid under a nonaccountable plan. Which costs qualify in the first place is covered in which law firm expenses are deductible.
Whether pay is reduced to cover expenses. Publication 463 treats an arrangement that repays business expenses by reducing reported wages as a nonaccountable plan, because the employee was entitled to the full pay anyway.
Per diem and mileage allowances. An allowance at or below the federal rate can stand as proof of the amount if the employee proves the time, place and business purpose. Publication 463 says that shortcut does not cover an employee who is related to the employer, which includes someone owning more than 10 percent of a corporation's stock; an owner must be able to prove the expenses to the IRS.
The mileage rate in effect. The IRS business standard mileage rate for 2026 is 72.5 cents a mile for January 1 to June 30 and 76 cents a mile for July 1 to December 31, according to the IRS standard mileage rates page. For 2025 it was 70 cents.
Each employee separately. Under Treas. Reg. 1.62-2(i), the rules apply employee by employee, so one associate's missing receipts do not taint everyone else's reimbursements.
Health insurance is a separate question. Premiums the firm pays for a more-than-2-percent S corporation shareholder follow their own reporting rules; see how S corporation owners handle health insurance.

For example: an owner's trip to a deposition

For example, imagine a lawyer who owns all the stock of her S corporation law firm and is paid a salary through payroll. In March 2026 she flies to a deposition and pays $1,600 on her personal card: $640 for airfare, $720 for two hotel nights, $180 for meals while away and $60 for taxis. In April she also drives 400 miles to client meetings. The firm's written plan uses the fixed date method. Within 60 days of each expense she submits an expense report with the hotel bill, the other receipts and a mileage log showing dates, destinations and purpose. The firm reimburses $1,600 plus $290 of mileage at 72.5 cents a mile, $1,890 in all, in a payment separate from her salary. Nothing is added to her W-2, and the firm deducts the costs, with the $180 of meals limited to a $90 deduction. Because she owns more than 10 percent of the stock, she keeps the log and receipts in a form she could show the IRS. Had the firm simply added $1,890 to her paycheck with no report, it would be wages subject to withholding and payroll tax. This is a hypothetical, not a real case.

Common mistakes with law firm reimbursements

A monthly "expense allowance" with no reporting. A flat amount the employee keeps regardless of spending is wages.
Reimbursing from a summary, not records. A card statement total or a category like "travel" does not meet the substantiation rule.
Letting advances sit open. Unreturned excess becomes wages once the reasonable period ends.
Running personal costs through the plan. Claiming business expense deductions for personal spending is a listed fraud indicator in the Internal Revenue Manual, and commingling firm and personal money is one of the back-office problems in Don't Neuberger Your IOLTA Account.
Folding the reimbursement into salary. If wages and reimbursements are combined, the reimbursement must be separately identified.
Treating client cost advances as employee reimbursements. Costs advanced for a client's case raise different questions, discussed in the IOLTA post linked above, and belong in the client ledger, not the expense report.

What to do this week

Check whether your firm has a written reimbursement policy, and whether anyone has followed it.
Pick a safe harbor, fixed date or periodic statement, and write the deadlines into the policy.
Create a simple expense report form that asks for the amount, date, place, business purpose and, for meals, who attended.
List firm expenses owners paid personally this year and gather the receipts while they are still within the 60-day window where possible.
Set up a mileage log for anyone who drives for the firm, using the 2026 rate for each half of the year.
Review how reimbursements are coded in payroll so they do not land on a W-2; payroll coding also affects when a small firm has to deposit payroll taxes.

Frequently asked questions

Does an accountable plan have to be in writing?

The regulation describes the plan as an arrangement and looks at whether it requires substantiation and the return of excess amounts. A written policy is the practical way to show that it does, and it is the first document worth having ready if the plan is ever questioned.

Can a solo lawyer with no employees have an accountable plan?

The plan rules apply to reimbursements paid to employees. A sole proprietor deducts business expenses directly on Schedule C, so there is nothing to reimburse; an owner on the payroll of their own corporation is an employee and can use a plan.

What happens if an employee misses the 60-day deadline?

The 60 days is a safe harbor, not the only reasonable period, but the firm may treat a late item as unsubstantiated. Under the regulation, amounts not substantiated or returned within a reasonable period become wages subject to withholding.

Are reimbursed meals still limited to 50 percent?

For the firm, generally yes. Publication 463 says an employee reimbursed under an accountable plan is not subject to the limit, which instead applies to the employer that deducts the meal.

What records should the firm keep?

The same records the employee would need to prove the deduction to the IRS: receipts for lodging and for other expenses of $75 or more, and a timely log of the elements. The details are in what records the IRS requires to support business deductions.

Does a home office or cell phone qualify?

It can, if the cost is a deductible business expense of the employee's work for the firm and is substantiated like any other expense. The expense must have a business connection, and personal use has to be separated out.

What if the IRS audits the plan?

An examiner can treat nonaccountable payments as wages and assess employment taxes, and penalties can follow; see what penalties the IRS can add after an audit. Strong records are the main defense.

Setting up reimbursements the right way

An accountable plan is simple once it is in place and expensive when it is missing. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel and can review how your firm reimburses expenses before an examiner does. The accountable plan and expense bookkeeping are the second-quarter focus of the Quarterly Tax Health Checkup. To start, contact the firm or call (571) 560-8674.

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