Employee Expenses 101: What Should Your Business Cover?
Some employers choose to have an expense reimbursement policy in place at their small business. Here are several types of expenses you may consider addressing in an expense reimbursement policy, as well as information on how to maximize the tax benefits related to the employee expense reimbursement.
It is important to understand that the expense must have a clear business character. It should be a purchase that's related to the services of an employee to his or her employer - in other words, something that an employee needs to do their job. This is a pretty broad definition, and could cover anything from an overnight hotel stay during a business trip to an extra display to hook up to your work computer.
It is vital that evidence of the payment can be substantiated in the shape of a receipt, invoice or other document. The information that should be displayed on the receipt include the total amount with tax, the time and place of purchase and a description of the product or service provided.
Finally, any reimbursable payments should always be reported to the responsible department within a reasonable amount of time. Any surplus amount that the employee has left from the original reimbursement should also be paid back to the employer within the same timeframe.
Here are some various categories that your company could consider reimbursing:
It all starts with getting to the airport — a short trip that starts racking up costs by taking public transport or a taxi service. The flight itself also accounts for a large sum, and should include any in-flight food and drink purchases up to a reasonable amount. Upon arrival at the destination, lodging costs are another staple expense that needs to be covered.
Meals and Entertainment
If an employee is having dinner on a work trip, it should automatically be covered as a travel expense — of course. But then there's the possibility that an employee wants to treat a client or contact to dinner, because they think it would positively impact the business relationship. In this case, covering these costs would be in the interest of your business.
Required Tools and Equipment
Some employers require employees to purchase items that are considered primarily for the benefit or convenience of the employer (tools used in the employee's work, for example).
If an employer requires employees to wear a uniform, the cost and maintenance of the uniform is considered to be a business expense of the employer.
Reimbursing Business Expenses
Any business expense should be substantiated to qualify for reimbursement. In the case of mileage, a travel log prepared by the employee is acceptable. For ease of tracking, you can ask employees to use a mobile app, such as ExpenseWire, to input all business-related expenses for reimbursement. Receipts can be scanned and saved in the app to reduce paperwork.
Maximizing Reimbursement-Related Tax Benefits
To maximize the tax benefits related to employee expense reimbursement, companies may set up an accountable plan. Expenses detailed and reimbursed under this plan are not considered taxable income to employees and therefore not subjected to payroll tax. When choosing to reimburse expenses under a nonaccountable plan, the amount employees are paid is considered income for tax purposes. Companies may use a combination of an accountable plan and a nonaccountable plan if they wish to reimburse some expenses tax-free and others (such as meal per diems) as taxable income.
The key to successful employee expense reimbursement is to have a documented policy defining reimbursable expenses and stipulating how they will be repaid. As your company grows and the number of employee expense reimbursement requests increases, moving to an online accounting system, such as Quickbooks or Kashoo, may help increase reimbursement efficiency and policy enforcement.
Need help creating this employee reimbursement policy? OptimizeHR can assist with the creation of this policy. Give us a call today to set up a consultation.