Accountable plan
The IRS rules an employer's reimbursements have to follow for mileage, per diem and other business expenses to stay tax-free for the employee.
In short
- Three conditions: a business connection, substantiation within a reasonable time, and returning any excess.
- Mileage up to the IRS rate and per diem up to the federal rate count as substantiated when the trips are recorded.
- Fail any condition and every payment under the arrangement is taxable wages.
An accountable plan is a US employer's arrangement for reimbursing business expenses that meets three IRS conditions. Paid under one, a reimbursement isn't wages: it stays off the employee's W-2 and nothing is withheld from it. Paid outside one, the same money is taxable pay.
The three conditions
The expense has a business connection: the employee paid it while working for the employer. The employee substantiates it within a reasonable time, which for driving means the date, destination, business purpose and miles of each trip, and for travel the dates, place and purpose. And the employee returns any advance or allowance that goes beyond what they substantiated. An arrangement that fails any one of the three is a nonaccountable plan, and everything paid under it is wages.
Mileage and per diem
The IRS lets an employer skip the receipts for two common expenses. A mileage allowance at or below the standard mileage rate is treated as substantiated if the trips are logged, under Rev. Proc. 2019-46. A per diem at or below the federal rate for the place of travel is treated the same way under Rev. Proc. 2019-48. Only the part above those rates is taxable. A flat car allowance paid whether or not the employee drives for work is never accountable. The current rates are on the IRS mileage rate page and the GSA per diem page.
Worked example
Mileage at 85 cents
A company pays 85 cents a mile under a plan that requires a trip log. An employee logs 1,000 business miles in August 2026, when the IRS rate is 76 cents. $760 is a tax-free reimbursement. The other $90 goes on the W-2 as wages, with withholding, because it is above the IRS rate.