Reimbursable expenses: A breakdown
As a small business owner, managing expenses is more than just balancing the books. Employees will often need to spend their money on job-related items, and it’s your job to ensure they’re paid back on time and in full. But how should you go about that, and how do you know which expenses are reimbursable?
In this article, we’ll demystify the concept of reimbursable expenses, offering insights into who it affects, how to navigate reimbursements, and the crucial steps to manage these expenses effectively. Whether you're an employer, an employee, or a finance professional, understanding the intricacies of reimbursable expenses is key to maintaining financial health and compliance within your organization.
What are reimbursable expenses?
Reimbursable expenses are costs incurred by employees on the job, which will need to be eventually compensated by the employer. These expenses can range from office supplies to professional development costs — and everything in between.
The critical aspect of these expenses is that they are necessary and directly related to the job, making them eligible for reimbursement. Employers typically set guidelines on what qualifies as a reimbursable expense, ensuring clarity and consistency in financial transactions between the company and its employees.
Should employers have an expense reimbursement policy?
As a general rule of thumb, every employer should have a clearly defined expense reimbursement policy. This policy serves as a guideline for employees and management, outlining what constitutes a reimbursable expense and the process for submitting these expenses.
Such a policy streamlines the reimbursement process and ensures transparency and fairness in handling employee expenses. It also helps you avoid misunderstandings and disputes and can provide tax benefits for yourself and your employees.
A well-crafted reimbursement policy can significantly contribute to maintaining a positive work environment where employees feel valued and are more likely to adhere to company protocols.
So, what expenses are reimbursable?
Identifying which expenses are reimbursable is the first step in nailing your expense policy. Typically, these expenses include, but are not limited to:
Business travel: Airfare, hotel stays, and ground transportation for any business-related travel.
Mileage rate reimbursements: Compensation for using personal vehicles for business purposes, typically based on the IRS mileage rate.
Meals and entertainment: Costs incurred during business meetings or while on business trips.
Office supplies and equipment: Necessary items purchased for job performance.
Professional development: Course fees, seminar registrations, and related expenses.
Home office expenses: For remote workers, a portion of internet costs or necessary home office equipment.
How to reimburse business expenses
The process of reimbursing business expenses generally involves a few key steps:
Documentation: Employees submit proof of their expenses, usually as receipts or expense reports.
Verification: The finance team or managers review the costs submitted to ensure they align with company policies.
Approval: Once verified, the expenses are approved for reimbursement.
Payment: The company then processes the reimbursement, which can be issued through payroll or as a separate payment.
This process can be done manually with software like Excel, but you should note that these traditional methods of expense reimbursement can be time-consuming and prone to errors, especially in larger organizations or when dealing with a high volume of expenses.
This is where expense management software becomes invaluable. Tools like Expensify automate and streamline the reimbursement process so employees can easily upload receipts, track their expenses in real time, and submit reports digitally.
For managers and finance teams, approving expenses becomes quicker and more efficient, reducing the time from submission to reimbursement. This digital approach speeds up the process and enhances accuracy and transparency during every step of the reimbursement process.
Are reimbursements taxable?
Before understanding the tax implications of reimbursements, let’s break down the differences between accountable and non-accountable plans.
Accountable plans
Employees must substantiate their expenses with receipts or other proof.
Any excess reimbursement or allowance must be returned to the employer.
Expenses must be business-related and incurred while performing job duties.
Non-accountable plans
No requirement for employees to substantiate expenses.
Employees are not required to return any excess reimbursement.
These payments are often given as allowances or per-diems without specific expense reporting.
With these definitions in mind, the tax implications become more apparent. Reimbursements under an accountable plan are not considered taxable income since they’re strictly for substantiated business-related expenses within reasonable limits. This arrangement benefits both parties by ensuring compliance with IRS guidelines and avoiding additional tax liabilities.
On the other hand, reimbursements under a non-accountable plan are treated as taxable income. Since these payments are not substantiated or exceed the necessary business expenses without returning the excess, they are subject to standard payroll taxes and must be reported accordingly.
TLDR: Aim to create reimbursement policies that align with the accountable plan criteria to avoid unintended tax burdens and maintain transparent financial practices.
Benefits of managing employee expenses
Effectively managing employee expenses is beneficial for your business and your employees alike. These benefits include:
Improved financial management: Clear tracking and categorizing expenses help in better budgeting and financial planning.
Increased transparency: A standardized process for submitting and approving expenses fosters an environment of trust and openness.
Enhanced employee satisfaction: Timely and fair reimbursement practices increase employee morale and loyalty.
Compliance and risk management: Adhering to IRS guidelines and legal requirements reduces the risk of financial irregularities and associated penalties.
Efficiency and productivity: Streamlining the reimbursement process saves time and resources, allowing employees to focus on their core job responsibilities.
Employee reimbursement has never been easier
Understanding reimbursements is a must for any small business owner. Luckily, you don’t have to do the heavy lifting alone.
Expensify steps in to help, offering an intuitive platform that automates and accelerates the reimbursement process from start to finish. With its user-friendly interface and quick processing capabilities, Expensify ensures that managing employee expenses is hassle-free and effective for businesses of all sizes.
Ready to simplify employee payments? Sign up today.
