If you reimburse an employee (including the employee wages of a shareholder) and you don't have an accountable plan, the reimbursement must be included in box 1 wages and is subject to federal, state, fica and medicare tax. The employee would be allowed to deduct the expenses as unreimbursed work expenses on form 2106 subject to itemization and the 2% rule.
If you have an accountable reimbursement plan, the reimbursements do not need to be added to wages.
Generally, even if you have an accountable plan, the employee must submit documentation within a reasonable time period (30 or 60 days) or the reimbursement will have to be considered non-accountable.
