In the normal day-to-day business operations of a company, employees will occasionally spend their own money. Out-of-pocket expenses increase when your employees travel, host events, or work closely with customers. Do you have a plan to effectively manage employee reimbursements?
Without a solid expense policy, employees can be loath to spend on the company’s behalf—or they may spend with abandon, assuming it will be reimbursed in full. The company can lose track of spending, encounter unexpected employee expenses after the fact, and end up with unhappy and untrusting employees. An enforceable expense policy and reimbursement plan can solve these problems, and today we’ll show you how.
What is an expense reimbursement policy?
A business expense reimbursement policy is a set of rules or guidelines for paying back employees when they spend their own money for the company. Your company reimbursement policy can include approved expenses, budgets, documentation, submission, and the payback process.
A reimbursement policy protects both employees and the company from misuse of funds and lack of trust. A well-executed policy will reimburse employees in a timely manner and help the company stay on top of budgets and books without the unpleasant surprise of owing an employee extra money.
Your reimbursable expense policy should outline:
- Who can spend for the company
- How much they can spend
- What they can spend money on
- How to document expenses
- When they’ll get reimbursed
- How they’ll get reimbursed
- What happens when expenses aren’t authorized
How to create an expense reimbursement policy
An expense reimbursement plan is best formed with the teamwork of finance, HR, and operations organizations within your company. There are stakeholders throughout the company with a vested interest in an effective expense policy, so you’ll need to carefully work together through the following steps to create a policy that is best for your company.
1. Determine reimbursable expenses
First decide which expenses will be clearly outlined as acceptable, reimbursable expenses. The list needs to be explicit and exhaustive to protect the employees and the company. It can be useful to have departments submit expenses they deem necessary but remember—this policy is for reimbursements, so it should only include expenses for which a corporate card or account could not have been used.
Travel: The most commonly reimbursed expense
For most companies, travel is the most common driver of out-of-pocket spend. Flights and hotel accommodations are usually handled by a travel department and put on a company card, but what about per diem and random expenses? Will the company reimburse for taxis, food, coffee, checking bags, etc? Start with your corporate travel policy, then walk through each travel expense that employees submitted for the last several business trips. Don’t forget to consider mileage reimbursement (the mileage rate for 2021 is 56 cents/mile).
Accountable plan expenses
An accountable plan is one that follows IRS guidelines for reimbursing employees and where reimbursements are not counted as taxable income. Accountable plans have the following requirements:
- Expenses are business-related
- Expenses are reported in a timely fashion
- Excess reimbursement is returned to employer
2. List reimbursable expenses
After discussing and reviewing all potential expenses, it’s important to create an exhaustive working list. You may consider breaking the lists into jobs or departments, or even supplying preferred vendors or budgets for expense items.
Examples of reimbursable expenses
- Entertainment and meals for clients
- Employee lunches
- Employee gifts or rewards
- Office supplies
- Office holiday decorations
3. Set up non-accountable plan expenses
In the past, employees could claim some business expenses as deductions on their taxes if they weren’t reimbursed for them. In 2017, the Tax Cuts and Jobs Act removed these deductions, but allowed businesses to compensate by offering non-accountable expense plans.
Businesses that provide employees with an “allowance” that can be used as employees see fit would fall under a non-accountable plan, which would then be subject to taxes, like income.
4. Outline pre-approval process
A need for pre-approval may depend on the type, magnitude, and origin of the business expense. Determine whether your employees will need pre-approval from managers every time, or for purchases over a certain threshold. Do they need verbal or documented approval? Consider workflow between employees, managers, and finance teams.
If you use a budgeting platform like Divvy, employees can’t spend over their budget limits—though, they can request additional funds on-the-fly as needed.
5. Choose an expense reporting process
How will employees record their expenses on behalf of the company? Most companies require receipts, but more clarification is usually needed. Are screenshots acceptable? Physical receipts? Photos of paper receipts? Bank statements?
A total on its own can be misleading, so decide upfront if you’ll require description of items, vendor, date, and time on each receipt. This data is hard to get after the fact, so be sure it’s outlined explicitly in advance. Expense reporting software can auto-populate this information and send it immediately to approval parties.
6. Create a reporting process & deadline
Consult with finance teams to choose a reporting process and deadline for submitting reimbursable business-related expenses. Will you need forms? Who will need to sign off? What route will the expense report take through the company? What is the acceptable window for submitting requests for reimbursement?
7. Build your reimbursement
Finally, how will your employees be reimbursed? The finance teams will need to choose a method for paying back employees, such as a check or adding it to their next paycheck. Consider the length of time each method will take to return funds to the individual.
Be aware that for some employees, putting a large amount of company spend on their personal cards can be a major burden. If your reimbursement process takes longer than a couple of weeks (or even worse, longer than the payback period for their credit line), you may be adding unnecessary stress to an employee’s personal finances. In a recent study, we found that companies can empower employees and improve company culture with a better corporate card platform, rather than asking them to float company spend on their personal cards.
8. Prepare for disputes
In the reimbursement process, there may be differences in opinion. What will you do when an employee submits an expense report for unapproved purchases or purchases over budget? What will you do when you suspect dishonesty or error in an employee expense report? Multiple teams may wish to weigh in on this process, including leadership, HR, and finance.
When you’ve finalized your dispute process, make sure that employees know the policies and procedures beforehand, so they will be prepared for any unapproved spending.
Employee reimbursement plan documentation
It is vital to think through every moving piece of the reimbursement process and gather insight before writing up an expense reimbursement plan for your company. Documentation is an equally critical element to your reimbursement policy, since multiple parties will need to refer back to it frequently.
Things to consider for documentation
Definitions: No matter how clear you think your terminology may be, you must explicitly define each and every term and expectation. Does travel mean by plane, train, and automobile? What about renting scooters or bikes in the city for transportation? Does “receipt” mean physical or electronic?
Expense report beta test: Once written up, have an employee with an expense report walk through it step-by-step. Ask them to note confusing or redundant directions so you can refine the language and parts of your policy before launching.
Accessibility: Each and every employee needs access to the reimbursement policy. It should be posted in your workplace wiki, but a downloadable, application, or cloud-based document is necessary for on-the-go reference.
How to implement your employee reimbursement plan
While the documentation may be completed, it is recommended to fine-tune the roll-out of any new employee reimbursement plan.
Small group beta test: Select a small group of employees to run a beta test of your new expense reporting system. Real business-related expenses (a client lunch) or a practice expense (coffee for the team) can be used to test the reimbursement policy. A good system will respond to feedback with iterations that better meet the company’s needs.
Announce: When you feel confident in your reimbursement plan, it’s time to announce it to the company. We recommend sharing the written policy with a brief summary via slack or email with a link to the permanent location. You should also indicate where employees should direct their questions.
Training: In your next company-wide meeting or via online training, provide clear instructions for every employee, especially regarding pre-approvals and what documentation is needed to submit for reimbursement.
How to reimburse employees
When it’s time to actually reimburse your employees—how will you get their money to them? Your choice will depend on the frequency and total of your average reimbursements, as well as the amount of time it will take your accounting team to manage each option.
- Payroll: Likely the easiest and fastest choice, you can simply add a line item of reimbursement to their payroll check so they are reimbursed by the next pay period. If they are accountable plan expenses then they are added without the income tax.
- Checks: The accounting team can cut checks for individual reimbursement either by expense report or once a month.
- Reimbursement software: If you already have an expense management platform, you can process reimbursements automatically. Most platforms, like Divvy, will reimburse employees in just a few clicks through ACH or payroll.
Enforcing your Employee Reimbursement Plan
For any good reimbursement plan to work, businesses need careful enforcement. Unfortunately, there’s always the possibility of occupational fraud from employees. You can mitigate issues by creating an exhaustive and explicit expense policy and preparing beforehand with consequences for abuse.
Business expense fraud committed by employees is estimated to cost U.S. businesses more than $2.8 billion per year, according to a recent survey by Chrome River. There are six types of expense fraud, from fictitious expenses to altering receipts. You can prevent this fraud by requiring careful documentation of itemized receipts, or utilizing business expense software to minimize falsified documents or alterations.
Learn more about how fraud is impacting your bottom line in our free ebook.
More commonly you’ll be dealing with employee overages. When an employee spends $50 on a client lunch without understanding that the reimbursable amount is only $40, what will you do? Reimbursing that extra $10 to the employee might not seem like much, but it can add up over time and send the message that budgets are mere suggestions.
Instead set the precedent that spending will only be reimbursed up to the allowable limit. Virtual cards can help you set enforceable budgets that cannot be exceeded to avoid this problem.
Frequently asked questions
Are reimbursements reported as income?
No—reimbursements for employee expenses are not reported as income. A non-accountable plan would provide an allowance to employees which would be taxed as income.
How do you determine what can and cannot be reimbursed?
It is up to each business to decide what will be allowed and reimbursed when it comes to employee expenses. Generally, appropriate expenses are those considered necessary to the business. What’s necessary may vary from business to business, employee to employee, or even day to day. Work with a coalition of leaders in your organization to determine what can and cannot be reimbursed for your business.
Should you always require receipts for reimbursements?
Some type of documentation should be required for reimbursements of any kind. Automatic expense reports or other digital records can suffice so long as they indicate what, where, and when the expense occurred. Documentation for reimbursements (whether receipts or otherwise) are important for taxes and minimizing the risk of fraud.
Do I have to pay taxes on reimbursements?
If you have an accountable plan and the expenses were approved then reimbursements are not taxed. Non-accountable plan reimbursements are taxed normally as wages. Read more about the taxes around employee reimbursements here.
What’s the difference between an accountable plan and a non-accountable plan?
An accountable plan is one under which employees may be reimbursed for company expenses that are reported within a reasonable amount of time, and are not taxable. A non-accountable plan allows for employee reimbursements or allowances for certain types of spending that are taxable. Read more about accountable and non-accountable plans here.