The complete guide to employee expense reimbursement
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The complete guide to employee expense reimbursement
Professionals from an architect business are gathered in a table meeting with food and business documents at the center.
As a business owner, it’s a good idea to get a handle on how expense reimbursement programs work and create your own employee expense reimbursement policy so you can keep spending under control within your company.
In this article, Ramp takes a deep dive into the topic of expense reimbursements, with examples, strategies, and alternatives that you can apply to your business immediately.
What is expense reimbursement?
Employee expense reimbursement is exactly what it sounds like: the process of an employer reimbursing an employee for any work-related expenses they paid for with their personal funds.
In other words, it’s a payment you make to your employees to compensate them for any out-of-pocket expenses they incur while carrying out their job duties. Typically, this will be a dollar-for-dollar match, which can be added to an employee’s regular paycheck or as a separate payment via either check or direct deposit.
These payments are also sometimes called employee reimbursements.
The importance of employee expense reimbursement
Technically speaking, at the federal level, employers aren’t required to reimburse employees for business expenses unless those expenses drop an employee’s wages below the federal minimum wage. However, some states and even particular cities have their own employee reimbursement laws.
Regardless of whether you’re legally required to do so, if you don’t reimburse your employees for legitimate expenses they incur as a part of their job, you risk:
- Eliminating your employees’ incentive to make purchases, even when they’re business-critical.
- Hurting your business’s ability to attract and retain customers and clients, stay competitive, and turn a profit in a fast-moving economy.
- Hurting employee morale and making it harder to maintain an engaged workforce.
As a bonus, when you reimburse your employees for work-related expenses, you may be able to deduct many of those expenses come tax time—effectively lowering your taxable income for the year.
This doesn’t mean you shouldn’t reimburse legitimate expenses incurred by your employees just because they aren’t deductible. But limiting non-deductible expenses whenever possible is important to the long-term financial health of your company.
Common examples of reimbursable expenses
While it’s impossible to compile a comprehensive list of every possible reimbursable expense, here are examples of some of the most common types of expenses—including travel and non-travel expenses.
Business travel
Many employees travel as a part of their job. Business travel can include trips to meet with customers, clients, prospects, suppliers, distributors, and other partners. It can also involve other types of business meetings, such as company retreats, all-hands meetings, networking events, conferences, and more.
If your employees pay out of pocket to cover any travel costs, those are typically reimbursable as long as they meet the requirements outlined in your company’s travel reimbursement policy. Examples of business travel expenses can include:
- Costs related to flying: Airfare and airplane tickets, baggage and other airport fees, travel documentation (such as passports), in-flight purchases.
- Costs related to driving: Rental cars, taxi and rideshare fares, gas, parking fees, tolls, mileage reimbursement (typically the standard mileage rate for use of a personal vehicle.)
- Costs related to lodging: Hotel bookings, long-term rentals, housekeeping fees, tips.
- Costs related to communication: Cell phone plans, Wi-Fi, hotspots.
- Other travel costs: Train tickets, ferry fares, other forms of travel.
As a side note, costs related to employee commuting typically aren’t considered a business expense.
Meals and entertainment
Reimbursing employees for meals and entertainment can sometimes get tricky. Generally speaking, though, these expenses are considered reimbursable as long as they have a clear business purpose or can be clearly tied back to the employee’s duties.
Usually, meals an employee purchases while traveling are considered reimbursable, provided they aren’t extravagant. The same goes for meals and entertainment related to business meetings, customer or client meetings, and team-building activities.
Reimbursement may include restaurant meals, tips, and service charges. It can also include ready-made meals, groceries, or ingredients if an employee chooses to cook for themselves during travel.
Supplies and tools
If an employee uses their own money to purchase supplies or tools that are necessary for them to complete their job, those costs are often considered reimbursable. This can include things like:
- Office supplies: Pens and pencils, paper and other stationary, cleaning supplies.
- Electronics: Desktop or laptop computers, monitors, printers, fax machines, business phones or smartphones, software subscriptions.
- Tools and equipment: Plumbing tools, electrical tools, carpentry tools, or any other tools your employee needs.
- Uniforms and work gear: Including dry cleaning or laundering costs during travel.
Many small businesses offer remote employees a home office stipend to cover these and other business-related expenses. Stipends can be a one-time deal or take the form of monthly, quarterly, or annual allowances.
Professional development and training
When an employee completes additional training or learns new skills, it can empower them to do their job more efficiently and effectively. With this in mind, many employers offer their workers professional development stipends that can be used to fully or partially reimburse costs like:
- Tuition for workshops, courses, certificates, and even advanced university degrees.
- Exam fees related to certifications and recertification.
- Educational supplies such as textbooks, software subscriptions, and other educational materials.
- Attendance at conferences, seminars, and other types of networking events.
Are reimbursed expenses taxable?
The taxability of employee reimbursements depends on whether the expense is considered a business expense by the IRS and what kind of expense reimbursement plan is used: namely, an accountable or non-accountable plan.
An accountable plan is a reimbursement arrangement that meets certain IRS requirements. With an accountable plan, employers can reimburse employees for business-related expenses without having to report them as taxable income.
Under an accountable plan, there must be a business connection between the expense and the employee’s job duties. To be considered an accountable plan, you must also require your employees to submit adequate documentation and a “statement of business purpose” that defines the connection between the expense and the employee’s job.
In contrast, a non-accountable plan doesn’t meet the requirements of an accountable plan. In this case, all business expense reimbursements are taxable and should be reported as wages. That means you must withhold payroll taxes on any non-accountable reimbursements, and employees must report them as income when filing their taxes.
Understanding the 30/60 rule
The so-called 30/60 rule requires employees to submit reimbursement requests for business travel within 30 days, but no later than 60 days, of incurring expenses. If you fail to approve the expense and reimburse the employee within 60 days, the amount that you ultimately repay the employee will appear on their W-2 as taxable income.
Employees may claim unreimbursed business expenses as deductions on their income tax returns, but they must include them in their gross income first. These expenses shouldn’t exceed 2% of the employee’s adjusted gross income, so it’s essential to keep accurate records and documentation to claim them.
Managing employee expense reimbursements
For your business to effectively manage employee reimbursement requests, you need to have a comprehensive reimbursement policy. This policy should outline every step of the reimbursement process, including:
- Eligible expenses: Which out-of-pocket costs does your business agree to reimburse? Are there any exceptions that employees should be aware of?
- Timeframe: When are employees expected to submit their expense reports? What is a reasonable period of time in which they can expect to be reimbursed?
- Proof: What proof of purchase do you require an employee to submit along with their expense reimbursement requests? Examples can include receipts, invoices, and credit card statements.
Alternatives to expense reimbursement
When an employee covers an expense out of their own pocket, they’re essentially fronting their employer’s cost of doing business, which may or may not be fair or ethical for an employer to require.
Likewise, managing reimbursements can be a time-consuming affair—for your employees, who must compile and submit their expense reports; for human resources, who must reconcile and approve any expenses; and for your accounts payable department, who must issue payment.
With this in mind, you might want to consider these three alternatives:
1. Per diems
A per diem is a daily amount that you allow an employee to spend, typically while traveling. Employees can use their per diem to cover everything from meals and transportation to lodging and other accommodations. Many businesses prefer per diem rates and allowances because they remove the need for more detailed expense tracking and approval.
2. Cash advances
A cash advance is a lump sum given to an employee before an expense is incurred. Advances can be especially helpful when an employee is unable or unwilling to cover business expenses out of pocket, or when an employer doesn’t want to require an employee to do so. They can also help cover expenses when a merchant or vendor doesn’t accept a company credit card.
3. Corporate cards
A corporate card is a credit or charge card that employees can use to cover business expenses with pre-approved funds. Giving an employee access to a corporate card makes it possible to avoid most reimbursements altogether and may even translate into discounts on certain purchases, saving your business time and money versus a lengthy reimbursement process.
This story was produced by Ramp and reviewed and distributed by Stacker Media.
