Am I screwed for paying employees from personal account with no accountable plan?

I run a small business and got into a bit of a financial pickle earlier this year. Had an opportunity to purchase property instead of continuing to rent, which seemed like a smart long-term move. But between the down payment and some other unexpected expenses, I found myself in a serious cash flow crunch. During this tight period, I ended up paying my employees out of my personal checking account for two pay periods because the business account was running too low. Once the company started generating more revenue, the business account reimbursed me for those employee payments I covered personally. Here's where things got messy. My CPA just told me that since I didn't have an "accountable plan" set up beforehand, all that money the company reimbursed me is considered taxable income to me personally. He explained reimbursements are either "accountable" or "nonaccountable" - and apparently without the former, it's considered W2 wage income taxable to me while being a deduction for my corporation. So now we apparently need to amend the payroll tax filings from earlier this year to show this as W2 income to me, and I'm going to end up paying a significant amount in taxes for basically just fronting money to keep my business running. I'm feeling pretty deflated about this. Has anyone dealt with a similar situation? Is there any way around this or am I truly stuck paying taxes on money that was just passing through my account?

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18 comments

Kaiya Rivera

•8M

Unfortunately, your CPA is correct about the accountable vs. nonaccountable plan distinction. The IRS is very particular about this. For a reimbursement to be excluded from income, it needs to meet the requirements of an accountable plan, which should be established before the expenses occur. An accountable plan requires three things: 1) business connection - expenses must have a business purpose, 2) substantiation - you need to document the expenses within a reasonable time, and 3) returning excess amounts - employees must return any excess reimbursement within a reasonable time. Since you didn't have this formal structure in place when you paid employees from your personal account, the reimbursement you received later is technically compensation to you. The company can deduct it as wages, but you'll need to report it as income and pay the associated taxes. That said, make sure the business is properly deducting the original wage payments to employees as business expenses. At least the business should be getting the tax benefit of those deductions.

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Kaiya Rivera

•8M

Yes, that's correct. When the reimbursement is treated as wages, it becomes subject to all employment taxes. The employer will need to pay their share of FICA taxes (the 6.2% for Social Security and 1.45% for Medicare) on these amounts, plus potentially state unemployment taxes. The employee (in this case, the business owner) will also have the employee portion of these taxes withheld from the wages. So it definitely compounds the tax impact beyond just income tax. This is one reason why having proper accountable plans in place is so important for business owners who might need to cover expenses personally.

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Noah Irving

•8M

After dealing with a somewhat similar issue with my construction business, I found a service called taxr.ai (https://taxr.ai) that seriously saved me from a tax nightmare. I had mixed personal and business expenses for months before my bookkeeper caught it, and I was looking at a major tax hit. Their system analyzed all my transactions and documentation, then helped me create a proper accountable plan that my accountant could backdate appropriately. They even helped generate the supporting documentation showing the business purpose for each transaction. The best part was they showed me exactly how to structure things going forward to avoid this problem in the future.

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Noah Irving

•8M

For the backdating question - they explained that while ideally plans should be in place beforehand, what matters is demonstrating the expenses had legitimate business purpose and proper documentation exists. Their system helped organize everything to show the reimbursements were legitimate business expenses, which is what truly matters. They were careful to emphasize doing everything properly rather than trying to game the system. The entire process took about two weeks from start to finish. They needed some time to analyze my banking records and receipts, then prepare the documentation. They walked me through setting up proper procedures for handling business expenses going forward so I wouldn't have this problem again.

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Vanessa Chang

•8M

I was skeptical about taxr.ai at first, but after my accountant told me I was going to owe an extra $7,400 in taxes because of improper reimbursements, I decided to give them a try. They helped me properly classify and document all my transactions, and their accountants worked directly with mine to resolve the issues. The final result was that we were able to properly document the business purpose of all transactions and establish a formal accountable plan going forward. My tax liability ended up being about $2,100 instead of the $7,400 my accountant initially calculated. Wish I'd known about them before I created this mess in the first place!

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Julian Paolo

•8M

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•8M

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William Schwarz

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Lauren Johnson

•8M

You'd need to create a promissory note between yourself and the company, with reasonable interest terms (look up the applicable federal rate for the time period), and have your board of directors (even if that's just you) approve it retroactively. Then reclassify the "reimbursement" payment as loan repayment in your books. Be aware that this approach works best if the amount was clearly definable and specific, like covering exact payroll amounts. If you've been mixing personal and business expenses regularly without clear documentation, this becomes much harder to justify. Also, don't forget to include any interest required on the loan when doing your taxes - even if you choose to forgive it, there can be tax implications.

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