Reimbursements made under an "accountable plan" are deductible by your business, and are also excluded from the employee's gross income for payroll tax purposes. If you are a sole proprietor filing Schedule C, you would deduct these reimbursed expenses in the Schedule C categories to which they pertain; for example, reimbursed employee vehicle expenses would be reported on Line 9 and you must complete the information in section IV.
However, if the reimbursements are not made under an accountable plan, you must include the reimbursements in the employee's wages on IRS Form W-2. You would treat the reimbursements as part of the employee's compensation. If you are a sole proprietor, you'd include the reimbursements on Line 26 of Schedule C, "wages."
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