8 Tips for Creating an Expense Reimbursement Policy That Controls Costs
As of 2023, companies have been spending more on travel again, logging those miles across the country and the globe. But as trip volume continues to rise, so does the price of corporate travel and those out-of-pocket expenses employers typically reimburse along the way.
What does this mean for your organization’s financial health? If you don’t have one already, it may be time to create an expense reimbursement policy. One of the best ways to curb excess spending, this policy helps organizations control costs, prevent reimbursement fraud, and maximize deductions come tax time.
Establishing which costs are an employee’s responsibility and which should be reimbursed helps your company remain compliant with the most current regulations for remote workers and adequately compensates frequent fliers. And as a reflection of your company’s values, it also ensures your employees are paid equitably across the board.
BambooHR assists businesses of all sizes in putting their best practices into action with award-winning software that streamlines compensation for modern HR professionals and payroll administrators. In this article, we’ll take a look at what goes into a reimbursement policy, what counts as an eligible expense, and what to do once it’s all on paper.
8 Best Practices to Include in Your Expense Reimbursement Policy
A successful expense reimbursement policy educates your employees on this company benefit. It clearly defines your organization’s rules and processes for covering work-related costs and relays other expense-related information specific to your business. That way, everyone at your company can plan ahead for the things they may need to pay for themselves and feel confident they’ll be compensated fairly for the things they don’t.
Here are the best practices for a well-crafted reimbursement policy:
- Determine employee eligibility: If only full-time employees are eligible for reimbursement, this is where you make that distinction.
- Delegate responsibilities: Your policy should let everyone know who’s responsible for handling approvals, so people know where to submit qualified expenses.
- Identify work-related expenses: Speaking of expenses, explicitly stating what does and does not qualify for reimbursement minimizes confusion and helps ensure your coordinator won’t get bogged down with unnecessary requests.
- Set clear reimbursement rules: Dollar limits, deadlines, and other specifics help your company create a compliant, easy-to-manage policy.
- Explain how denials work: It’s not always going to be possible to say yes—your coordinator should know how to appropriately deny reimbursement.
- Break down approval protocol: Outlining expense-approval procedures helps streamline the process company-wide.
- Define how repayment works: Will your employees receive a reimbursement check or will payments be added to their regular paycheck? Explain how to reimburse employees for expenses, so everyone knows what to expect.
- Implement a reliable tracking system: Tools like all-in-one HR/payroll software solutions can help minimize errors, avoid delays, and make expense tracking simple.
It’s also a good idea to mention the laws that apply to your policy. According to the Fair Labor Standards Act (FLSA), employers aren’t legally required to reimburse employees for business-related expenses unless it drops their earnings below minimum wage or overtime due in any workweek. However, state law may offer more provisions.
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6 Examples of Common Reimbursable Expenses
Now, what are reimbursable expenses for employees? Backed by receipts, invoices, bank statements, and other documents, your reimbursement policy pays for qualifying out-of-pocket purchases. So if an employee spends money of their own while doing business, they can submit a request to get that money back.
Your policy may account for other costs, but here are six of the most common reimbursable business expenses:
1. Mileage Reimbursements
Mileage reimbursement is the money employees receive for using a personal vehicle for work. While most policies exclude the day-to-day commute, your employees may expense mileage for meeting with clients offsite or running errands for your company. On the flip side, businesses, independent contractors, and self-employed individuals can deduct mileage expenses from their taxes.
Employee mileage reimbursement rules vary. Many private employers keep it simple and just use the federal mileage reimbursement rate from the Internal Revenue Service (IRS). Other companies use a fixed and variable rate (FAVR) program to cover the incurred expenses for drivers in different locations.
2. Auto Allowances
An auto allowance is the money employees regularly receive every month, week, or pay period for business use of a personal vehicle. Allocated as a pre-determined, set amount, this stipend covers a variety of expenses, such as:
- Fuel costs
- Vehicle maintenance
While simpler than mileage reimbursement, the IRS views non-accountable car allowances as taxable compensation.
3. Travel Expense Reimbursements
Do your employees travel to other cities, states, or countries often? It’s common practice for businesses to pay for travel expenses at per diem rates. The travel expenses incurred may include:
- Transportation (e.g., airfare, train, taxi)
- Hotel stays
- Employee meals
- Incidental expenses
Some companies set their own arrangements, but many refer to the US General Services Administration per diem rate calculator. Updated frequently, this calculator takes seasonality, geographic location, and other factors into account.
4. Cell Phone Reimbursements
Employees who use email, voicemail, and productivity apps on the go may be eligible for a smartphone stipend. Typically a monthly allowance, cell phone reimbursement applies to people who use personal devices to conduct business. As an alternative, an employer may provide a smartphone as part of their fringe benefits.
In certain cases, self-employed individuals and employees may be able to claim a tax deduction for personal cell phone usage.
5. Employee Meal Reimbursements
If your company’s sales reps meet with clients over lunch, those meals can be expensed as part of your policy. Employers commonly set limits, track locations, and monitor amounts to help prevent misuse. According to the IRS, business meals are tax deductible up to 50%.
6. Incidental Expenses
Incidental expenses are the little things that come up in the course of business-related travel and other activities. These may be tips paid to hotel staff members and other miscellaneous fees. While individuals can’t deduct incidentals from their taxes, businesses usually can.
Since small dollar amounts can add up to big expenses by the end of the year, many employers are happy to include them as part of a comprehensive reimbursement policy.
Reimbursing Remote Workers for Work-Related Expenses
As remote work goes from the “new normal” to everyday life for US employees, many employers are updating their reimbursement policies to meet the needs of the modern professional. Not to mention, some states require businesses to cover certain expenses. Common reimbursements for remote employees include:
- Office equipment (e.g., computer, monitor, headset)
- Pens, paper, and other office supplies
- Home office furniture
Be sure to consult the reimbursement laws in your state to ensure your policy complies.
Examples of Non-Reimbursable Expenses
Your business can cover many things, but even the most generous reimbursement policy doesn’t compensate for every out-of-pocket expense. Clearly stating what your company will not pay for sets clear expectations and helps employees budget accordingly. Common examples of non-reimbursable expenses include:
- Childcare during business trips
- Spouse’s/children’s travel expenses
- Misc. convenience fees (e.g., airport lounge, mini bar, in-room movies)
- Parking fines, towing, and other fees related to mishaps
In addition to specific items or services, businesses may limit app-enabled payments to ensure there’s a clear way to audit each employee’s purchase history.
Are Employee Expense Reimbursements Taxable?
Taxability depends on whether your reimbursement program is considered accountable or non-accountable by the IRS. Many policies are structured as accountable plans, meaning the costs incurred are not considered taxable wages because they meet the following criteria:
- Expenses are connected to the business in some way.
- Payments are substantiated within a reasonable timeframe.
- Excess amounts are returned to the employer.
Under non-accountable plans, reimbursements fall outside IRS standards and are treated as supplemental, taxable income. This may be the full amount or just the payment outside of the federal per diem rate. For instance, reimbursements may fall under a non-accountable plan if:
- Employees aren’t required to provide receipts and other documentation.
- Employees are allowed to keep excess amounts they didn’t end up using for travel.
- Employee stipends are paid in advance, whether or not they’ll end up being used for business expenses.
In this case, the compensation counts as wages subject to employer payroll taxes.
Taxable Mileage Reimbursement Example
Let’s say Quinn receives a $300 mileage allowance each month for work. Under her company’s mileage rules for employees, she’s not required to track her mileage and return unused dollars. So, her mileage allowance is considered a non-accountable plan and her employer deducts taxes before paying her allowance.
How to Substantiate Business Expenses
The IRS requires taxpayers to justify expenses that qualify for deductions. This means diligent recordkeeping is key in providing sufficient evidence for each payout. To substantiate allowances, your evidence should answer the following questions:
- Who incurred the expense?
- How does the expense relate to your business?
- Where did the event occur?
- When was the payment made?
- How much was the out-of-pocket expense?
Going back to the previous example, an employee may be required to substantiate their mileage reimbursement via odometer readings, GPS, or a mileage tracking app that syncs with the company’s HR software. The IRS publishes detailed information on how to report and deduct business expenses.
Introducing Your Expense Reimbursement Policy
Once you have a formal reimbursement policy, make it easily accessible. It can be part of your employee handbook or a separate document saved to the Cloud as an on-the-go reference. Then, be sure to let people know it’s there—introducing your policy via email allows you to provide a brief overview and a link to its location.
If expense reimbursement is new for your company, your employees will likely have questions like, “Are reimbursements considered income?” or, “Does mileage reimbursement get taxed?” Hosting an in-person training session or webinar will help get everyone up to speed as you launch your new reimbursement system company-wide.
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