How to Create an Expense Reimbursement Plan for Your Business
Traveling, taking clients out for coffee or lunches, and buying office supplies—these are all costs that employees might charge to their personal credit cards as part of their jobs.
It’s common practice for the business to pay employees back for job-related expenses. Handling expense reimbursements correctly ensures you do it in the most tax-advantaged way while keeping your employees happy.
What Is an Expense Reimbursement?
An expense reimbursement is a payment made to an employee to repay them for business expenses they paid for out of their own pocket. Some typical expense reimbursements include business travel costs, business meals, use of the employee’s vehicle for business purposes, educational expenses, professional dues, and business supplies.
Why Have an Expense Reimbursement Policy?
Having a policy for employee expense reimbursements ensures employees don’t lose out on personal money spent on business-related expenses. Prior to the Tax Cuts and Jobs Act of 2017, employees could deduct unreimbursed work expenses as a miscellaneous itemized deduction on their tax returns. However, tax reform eliminated that category of deductions, so employees who aren’t compensated for their out-of-pocket work expenses are just out of luck.
But there are other benefits to having a well-crafted policy, such as:
Ensuring employees are aware of what types of expenses are reimbursable and how much they can spend
Saving time because you don’t have to spend time answering the same questions over and over again, chasing down original receipts, or dealing with non-reimbursable expenses
Curbing potential fraud by establishing internal controls over reimbursement requests
Ensuring the business has the right records to benefit from a tax deduction
How to Create a Reimbursement Policy
Now that you know why it’s beneficial to have a reimbursement policy, let’s cover some best practices for creating an effective reimbursement process.
1. Choose an accountable or non-accountable plan
You can compensate employees for business expenses using an accountable or non-accountable plan.
To qualify as an accountable plan, you must meet the following three requirements:
Only reimburse employees for expenses that have a business connection. If an expense is partially business-related—such as a personal vehicle used for business travel—you only reimburse the business portion of their car expenses.
Require employees to document their expenses within a reasonable time. You should require employees to submit an expense report plus original receipts or mileage logs within 60 days of incurring the cost.
Mandate the return of any excess reimbursements. Say you cover out-of-pocket employee expenses in advance—such as providing cash advances for business meals and incidental expenses on a business trip. Employees must still document those expenses and return any excess amount within a reasonable period.
Reimbursements made under an accountable plan don’t count as taxable income for the employee but are deductible expenses for the business.
A non-accountable plan is any expense reimbursement process that doesn’t meet the requirements outlined above. For example, say you give employees $50 per month to cover business use of their personal vehicles and don’t require them to submit mileage logs or document their actual expenses. In that case, the plan would be non-accountable. Reimbursements made under a non-accountable plan count as taxable income to the employee and are subject to payroll taxes.
2. Clearly outline and document your expense reimbursement process
Ensure employees understand what expenses you’ll reimburs and how to handle expense reporting.
Your policy should cover:
Who can spend money on behalf of the company
How much they can spend
What they can spend money on
How and when they must document their expenses
When and how they can expect to be reimbursed
What happens if they spend money on unauthorized expenses
Work with your legal advisor to draft policies that protect your business and employees.
3. Adopt a framework for expense reporting
If reimbursable expenses are rare in your company, you may use paper or digital expense reports.
However, if employees regularly pay for business meals, travel expenses, hotel rooms, parking fees, and transportation expenses with their personal credit cards, you should consider issuing corporate cards and investing in a tool that can streamline reimbursement requests and help with internal controls over expense reporting. Some options to consider include Divvy, Ramp, or Spendesk.
These expense management tools allow employees to submit expense reports and corresponding receipts directly from a computer, tablet, or smartphone, eliminating the need to fill out paper expense reports.
These tools can also automate much of the time-consuming work of expense management, including routing expense reports to approvers, flagging duplicate and unauthorized expenses, and categorizing expenses in your accounting software.
Protect Your Business with an Expense Reimbursement Policy
According to the Association of Certified Fraud Examiners (ACFE), expense reimbursement schemes account for 11% of occupational fraud cases and have a median loss of $40,000 per year.
Compensating employees for necessary expenses is key to keeping them happy. Creating a clear and thorough expense reimbursement policy and requiring employees to document their actual costs ensures employees are reimbursed for spending their hard-earned money while protecting your business capital.
If you need help setting up your expense reimbursement plan or selecting expense management software, schedule a call with Slate. We can help you comply with IRS rules while streamlining the reimbursement process.