If your employees wear uniforms, branded gear, or specialized clothing on the job, you're probably paying for some or all of it. That's a real business expense, and it should be working for you at tax time.
But here's where a lot of business owners quietly lose money: they handle employee clothing reimbursements the wrong way, and what should be a clean business deduction turns into a payroll tax headache instead. For both the business and the employee.
The good news is there's a straightforward IRS-approved solution called an accountable plan. It's not complicated, it doesn't require a lawyer, and once it's in place it protects both you and your team. Here's how it works.
Why Paying for Employee Clothing the Wrong Way Costs You Twice
When you reimburse an employee for work clothing without a proper plan in place, the IRS treats that payment as additional wages. That means it goes on the employee's W-2 as taxable income. They owe income tax on it. You owe payroll taxes on it, including your share of Social Security and Medicare. A reimbursement that should have been a simple business deduction just became an unnecessary tax event for everyone involved.
This catches business owners off guard because the intent seems obviously correct. You're paying for work clothing. Of course it's a business expense. But intent isn't enough for the IRS. The mechanism matters.
The same issue comes up whether you're handing employees a cash clothing allowance, reimbursing receipts informally, or fronting the cost and recouping it later. Without the right structure in place, those payments don't get the favorable tax treatment you're expecting.
What Clothing Actually Qualifies
Not all employee clothing can be provided as a tax-free benefit. The IRS applies the same qualifying test here that it does for individual deductions: the clothing must be required for the job and not suitable for everyday wear.
Clothing that generally qualifies includes required uniforms distinctive to the role, protective gear such as steel-toed boots or flame-resistant coveralls, specialized industry apparel like medical scrubs, and logoed branded clothing worn to represent the business publicly.
Clothing that generally doesn't qualify includes business suits, standard dress attire, and anything an employee could reasonably wear off the clock without it looking out of place.
If you want the full breakdown of what passes and what doesn't, we cover that in detail in our article on work clothing deductions for business owners. [Link to Article 1.]
What an Accountable Plan Is and Why It Changes Everything
An accountable plan is simply a reimbursement arrangement that follows three IRS rules. When those rules are met, reimbursements for qualifying expenses are completely tax-free to the employee and fully deductible by the business. No payroll taxes. No W-2 income. Clean on both sides.
The three rules are straightforward.
Rule 1: The Expense Must Have a Business Purpose
The clothing being reimbursed needs to be genuinely work-related and qualify under the IRS rules above. You can't run personal clothing through an accountable plan and expect the same treatment. The business connection has to be real and documentable.
Rule 2: Employees Must Provide Adequate Documentation
Employees need to substantiate their expenses within a reasonable time period. For clothing, that means a receipt and a clear record of the business purpose. This doesn't have to be elaborate, but it does have to exist. The IRS wants to see that somebody verified the expense was what it was supposed to be before the check was cut.
The general safe harbor is 60 days from when the expense was incurred. In practice, building a simple monthly expense submission process handles this cleanly for most small businesses.
Rule 3: Excess Payments Must Be Returned
If you advance money to an employee for clothing and they don't spend all of it, or can't document all of it, the remainder has to come back. The IRS safe harbor gives employees 120 days to return excess amounts. Unreturned excess gets reclassified as taxable wages, which is the outcome you're trying to avoid.
What Happens When You Don't Have One
If your reimbursement arrangement doesn't meet those three requirements, the IRS treats every dollar you pay as a nonaccountable plan reimbursement, which means taxable wages, full stop.
The consequences stack up quickly. The employee pays income tax on the reimbursement. You withhold and remit their share of Social Security and Medicare taxes. You pay your own employer share of those same taxes. You also have to report the amounts on the employee's W-2, which adds administrative work at year end.
The OBBBA, signed into law in July 2025, made this more consequential than ever. It permanently eliminated the ability of employees to deduct unreimbursed business expenses on their personal returns. That door is closed for good now. Employees who pay out of pocket for qualifying work clothing and don't get reimbursed through an accountable plan have no federal recourse. The tax benefit disappears entirely unless the employer acts.
For business owners in Georgia, South Carolina, and North Carolina, this matters especially. Unlike states such as California and Illinois, none of our Southeast states require employers to reimburse employees for work-related clothing expenses. That makes it entirely voluntary, and entirely your call. But the tax case for doing it right is strong.
How to Set One Up (It's Simpler Than It Sounds)
The IRS does not require a written accountable plan. Following the three rules is technically sufficient. That said, putting it in writing is strongly recommended. A written plan creates a clear paper trail, makes it easier to train employees on the process, and protects you if questions arise later.
The written plan itself doesn't have to be long or formal. A one to two page document that covers what expenses are eligible, what documentation employees need to submit, the timeframe for submitting expenses and returning excess amounts, and how reimbursements will be processed is all you need. Many accountants and payroll providers have simple templates that can be customized for your business.
Once the plan is in place, the ongoing process is equally simple. Employees submit receipts for qualifying clothing purchases. You review and reimburse. The reimbursement is coded as a business expense, not wages. Nobody pays taxes on it. Done.
One practical note: if you want to avoid any IRS ambiguity about whether a reimbursement is wages or a qualifying expense reimbursement, pay it as a separate transaction rather than rolling it into a regular paycheck. A separate check or direct deposit entry makes the nature of the payment immediately clear.
A Note for Employees
If your employer doesn't currently have an accountable plan in place and you're regularly buying uniforms or work gear out of your own pocket, it's worth raising with whoever handles HR or payroll. The tax benefit runs both directions. Your employer saves on payroll taxes. You stop absorbing a cost that the business should rightfully own. Most employers who don't have a plan in place simply don't know the option exists.
Actionable Takeaways
Take stock of what your employees are currently wearing for work and whether any of it qualifies under the IRS rules. If uniforms, branded gear, or protective clothing are part of your operation, an accountable plan almost certainly makes sense.
If you're reimbursing employees for clothing now without a formal plan in place, talk to your accountant about whether those past payments were handled correctly and how to structure things going forward.
If you don't have a written accountable plan, ask your accountant or payroll provider for a simple template. This is a low-effort setup with a real and ongoing tax benefit.
Revisit your plan annually. Tax law changes (the OBBBA being the most recent example) can affect what qualifies and what doesn't.
